The Dark Side of Regulating Fast Informed Trading

A speed bump in financial markets is an intentional delay imposed on trade execution. Its primary purpose is to mitigate asymmetric information by slowing down high-frequency traders (HFTs). In contrast to its intended purpose, this paper shows that a speed bump has the crowding-in effect on speed acquisition of HFTs, meaning that it can fuel their investment in high-speed technology. I investigate when the crowding-in effect dominates a speed bump's intended effect and explain its ambiguous impact on speed acquisition and equilibrium market quality