Need for Speed? Exchange Latency and Liquidity

Albert Menkveld and Marius Zoican

Working Papers from HAL

Abstract: 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.

Keywords: market microstructure; trading speed; information asymmetry; high frequency trading (search for similar items in EconPapers)
Date: 2016-01-11
New Economics Papers: this item is included in nep-mst
Note: View the original document on HAL open archive server: https://hal.science/hal-01253615v1
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Citations: View citations in EconPapers (7)

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Journal Article: Need for Speed? Exchange Latency and Liquidity (2017)
Working Paper: Need for Speed? Exchange Latency and Liquidity (2017)
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