Front-running dynamics

Dan Bernhardt, Bart Taub

Research output: Contribution to journalArticlepeer-review


We integrate a monopolist dual trader into a dynamic model of speculation. In static settings, [J.-C. Rochet, J.-L. Vila, Insider trading without normality, Rev. Econ. Stud. 61 (1994), 131-152] establish an irrelevance result-expected equilibrium outcomes are the same whether the monopolist speculator sees liquidity trade or not; and Roell [Dual-capacity trading and market quality, J. Finan. Intermediation (1990), 105-124] shows that with multiple speculators, dual trading benefits liquidity traders. In dynamic settings, these results are reversed: a front-running speculator exploits knowledge of future liquidity trade, extracting greater profits by smoothing profit extraction intertemporally. Front running introduces positive serial correlation to order flow. Accordingly, market makers discount past order flow in prices, but prices retain the martingale property.

Original languageEnglish (US)
Pages (from-to)288-296
Number of pages9
JournalJournal of Economic Theory
Issue number1
StatePublished - Jan 2008


  • Dual trading
  • Frontrunning
  • Informed speculators
  • Liquidity trade
  • Private information

ASJC Scopus subject areas

  • Economics and Econometrics


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