Back-Running: Seeking and Hiding Fundamental Information in Order Flows

• 成果类型: Article
• 署名作者: Yang, Liyan; Zhu, Haoxiang
• 署名单位: University of Toronto; Peking University; Massachusetts Institute of Technology (MIT); National Bureau of Economic Research
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhz070
• 发表日期: 2020
• 页码: 1484
• 关键词: market; auctions

摘要

We model the strategic interaction between fundamental investors and back-runners, whose only information is about the past order flow of fundamental investors. Back-runners partly infer fundamental investors' information from their order flow and exploit it in subsequent trading. Fundamental investors counteract back-runners by randomizing their orders, unless back-runners' signals are too imprecise. Surprisingly, a higher accuracy of back-runners' order flow information can harm back-runners and benefit fundamental investors. As an application of the model, the common practice of payment for (retail) order flow reveals information about institutional order flow and enables back-runners to earn large profits.