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Thorsten Hens

is a Professor of Financial Economics at the University of Zurich and Adjunct Professor of Finance at NHH in Bergen, Norway. He studied at Bonn and Paris and previously held professorships in Stanford and Bielefeld. His main research area is behavioural finance. Thorsten Hens has published more than fifty journal articles and is the co-author of seven books. Moreover, he has profound asset management experience from consulting pension funds in Switzerland.

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Thorsten Hens, Terje Lensberg, Klaus Reiner Schenk-Hoppé: Front-Running and Market Quality: An Evolutionary Perspective on High Frequency Trading

We study front-running by high frequency traders (HFTs) in a limit order model with continuous trading. The model describes an evolutionary equilibrium of low frequency traders (LFTs) who compete in portfolio management services by offering investment styles. The introduction of front-runners inflicts heavy losses on speculators, while leaving passive investors relatively unscathed. This encourages investment in the market portfolio and markedly reduces overall turnover. Speculative trading persists despite its lower profitability. By most measures, market quality is not affected to any significant extent by front-running HFTs.

Last modified: 2017.07.27.