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Related Experiment Video

Updated: Nov 11, 2025

Author Spotlight: Unlocking New Insights in fNIRS Studies - A Novel Framework for Inter-Brain Synchrony Analysis
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Frontrunning the signals: As arbitrage between sophisticates.

George A Akerlof1, Hui Tong2

  • 1McCourt School of Public Policy, Georgetown University, Washington, DC 20057; gaa53@georgetown.edu htong@imf.org.

Proceedings of the National Academy of Sciences of the United States of America
|March 24, 2021
PubMed
Summary

Sophisticated investors engage in frontrunning, an arbitrage strategy that harms uninformed traders without benefiting themselves or improving market information. This creates financial market inefficiencies.

Keywords:
financial marketsfrontrunningrent seeking

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Area of Science:

  • Financial economics
  • Market microstructure
  • Behavioral finance

Background:

  • Sophisticated investors may trade based on anticipated information, not just received signals.
  • Existing models often assume information is fully discovered before trading occurs.

Purpose of the Study:

  • To model a financial market scenario where sophisticated investors frontrun anticipated information.
  • To analyze the impact of this frontrunning on market efficiency and trader outcomes.

Main Methods:

  • Development of an arbitrage equation specifically for frontrunning strategies.
  • Simulation of trading behavior under conditions of imperfect and anticipated information.

Main Results:

  • Frontrunning by sophisticated investors occurs before information receipt.
  • The costs of frontrunning are fully borne by unsophisticated traders.
  • Sophisticated traders experience no net gain or loss from frontrunning.
  • Frontrunning does not lead to faster information discovery in the market.

Conclusions:

  • The study identifies a novel financial market anomaly: inefficient transactions where no party gains.
  • Frontrunning, as modeled, represents a transfer of wealth from uninformed to informed traders without market improvement.
  • This highlights a potential source of market friction and inefficiency not captured by traditional models.