The Fast and the Furious: Exchange Latency and Ever-fast Trading

Xuezhong (Tony) He (), Junqing Kang and Xuan Zhou

No 419, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper examines how technological innovations drive fast trading investment for both speculators and exchanges and their impact on market. The negative externality of the speed acquisition from fast speculators can result in excessive investment, which is intensified as speculators’ speed technology advances. As exchange’s speed technology advances, faster exchange makes faster speculators more concentrated; that is, higher exchange speed shrinks market fraction of fast speculators but stimulates their optimal trading speed. As the result, market liquidity is improved but price discovery is reduced. Policy makers aiming to balance price discovery and deadweight loss from costly speed investment may lead to a mismatch between the desired exchange speed for policy makers and the optimal speed supplied by exchange, echoing the concerns of market regulations about market failure on speed arms race.

Keywords: Exchange latency; high-frequency trading; speed hierarchy (search for similar items in EconPapers)
JEL-codes: D41 D44 D47 D82 D83 D84 G12 G14 G18 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2020-12-01
New Economics Papers: this item is included in nep-mst
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3681157 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:419

Access Statistics for this paper

More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford ().