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Pré-Publication, Document De Travail Année : 2016

Need for Speed? Exchange Latency and Liquidity

Résumé

Speeding up the exchange has a non-trivial effect on liquidity. On the one hand, more speed enables high-frequency market makers (HFMs) to update their quotes more quickly on incoming news. This reduces adverse-selection cost and lowers the competitive bid-ask spread. On the other hand, HFM price quotes are more likely to meet speculative high-frequency “bandits,” thus less likely to meet liquidity traders. This raises the spread. The net effect depends on a security’s news-to-liquidity-trader ratio. Empirical analysis of a NASDAQ-OMX speed upgrade shows that a faster market can indeed raise the spread and thus lower liquidity.
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Dates et versions

hal-01253615 , version 1 (11-01-2016)

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  • HAL Id : hal-01253615 , version 1

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Albert Menkveld, Marius Andrei Zoican. Need for Speed? Exchange Latency and Liquidity. 2016. ⟨hal-01253615⟩
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