Risk and Return in High-Frequency Trading

Matthew Baron, Jonathan Brogaard, Björn Hagströmer and Andrei Kirilenko

Journal of Financial and Quantitative Analysis, 2019, vol. 54, issue 3, 993-1024

Abstract: We study performance and competition among firms engaging in high-frequency trading (HFT). We construct measures of latency and find that differences in relative latency account for large differences in HFT firms’ trading performance. HFT firms that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies, including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

Date: 2019
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Working Paper: Risk and Return in High-Frequency Trading (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:54:y:2019:i:03:p:993-1024_00

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