The market quality implications of speed in cross-platform trading: evidence from Frankfurt-London microwave

Khaladdin Rzayev, Gbenga Ibikunle and Tom Steffen

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Exploiting information transmission latency between stock exchanges in Frankfurt and London, and speed-inducing technological upgrades, we show that when cross-market latency arbitrage opportunities are linked to the arrival of information, high-frequency traders' (HFTs’) activities impair liquidity and enhance price discovery by facilitating the incorporation of public information into prices. Conversely, when cross-market latency arbitrage opportunities are driven by liquidity shocks, HFTs improve liquidity and reduce trading costs, thus incentivizing information acquisition and trading with private information. These findings underscore the complex nature of the association between trading speed and market quality and reconcile mixed evidence in the extant literature.

Keywords: transmission latency; microwave connection; high-frequency trading; liquidity; price discovery (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2023-11-01
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (3)

Published in Journal of Financial Markets, 1, November, 2023, 66. ISSN: 1386-4181

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119989

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