Frontrunning the signals: As arbitrage between sophisticates.

This paper presents a model in which some sophisticated investors do not wait for receipt of a signal before purchasing an asset. Its critical innovation is an arbitrage equation for frontrunning. Some sophisticates who will receive information in the next period arbitrage against similar sophisticates who will act on that information in that next period when the information is received. The costs of such frontrunning are borne totally by unsophisticated traders-with no gain or loss to sophisticates. Nor does the frontrunning produce any information discovery. Thus, this paper describes a financial-market anomaly: of inefficient financial transactions with gains to no one.