Revisiting noise—Fischer Black’s noise at the time of high-frequency trading

Economists have analyzed noise trading from various viewpoints in the past, and they drew the most diverse conclusions. Noise trading has been interpreted as a facilitator of market liquidity, as a source of inefficiency, as a driver of easy money for more informed traders or for herds of uninformed ones. However, in an environment populated by High-Frequency traders, most financial theories need to be revisited, the theory about noise trading being one of them. By making use of a computer-based Agent-Based Model, this paper creates a scenario where a shock breaks the equilibrium and only some market participants receive, and act upon, such information. The results are that old-fashioned parameters, as informedness, arbitrage, market efficiency and herding behavior no longer carry the same meaning as they used to. The focus shifts from searching the mythical ‘true value’ of a security to executing orders with the shortest possible latency, to exploit trading opportunities and maximize profits.