Jun 6, 2011
Q & A
What is the relation, if any, between the practice of "front running" trades and the efficient market hypothesis?
EFF/KRF: First, if front running is profitable, there must be information in the trade that is not already in market prices. Thus, security markets must not be perfectly efficient. Second, if front running speeds up the rate at which a specific piece of information is brought into the market, we might even say it improves market efficiency. More generally, however, we have to consider how front running affects those who are gathering information and trading on it. If the threat of front running reduces their incentive to collect information, front running makes markets less efficient.
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ABOUT FAMA AND FRENCH
Eugene F. Fama
The Robert R.
McCormick Distinguished
Service Professor of
Finance at the University
of Chicago Booth School
of Business
Kenneth R. French
The Carl E. and Catherine
M. Heidt Professor of
Finance at the Tuck
School of Business at
Dartmouth College
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Dimensional Fund Advisors Ltd. is authorised and regulated in the United Kingdom by the Financial Services Authority (FRN: 150100), is registered in England and Wales under Company No. 02569601 and VAT No. 577327607. The registered office address of Dimensional Fund Advisors Ltd. is 7 Down Street, London, W1J 7AJ, United Kingdom. Dimensional Fund Advisors Ltd. is a subsidiary of Dimensional Fund Advisors.