Review of Financial Studies Vol. 33 No. 4 2020
Back-Running: Seeking and Hiding Fundamental Information in Order Flows*
Abstract
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.
- DOI
- 10.1093/rfs/hhz070
- Volume
- 33
- Issue
- 4
- Pages
- 1484-1533
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex