Order-Flow Segmentation, Liquidity, and Price Discovery: The Role of Latency Delays

Michael Brolley and David Cimon

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 8, 2555-2587

Abstract: Latency delays intentionally slow order execution at an exchange, often to protect market makers against latency arbitrage. We study informed trading in a fragmented market in which one exchange introduces a latency delay on market orders. Liquidity improves at the delayed exchange as informed investors emigrate to the conventional exchange, where liquidity worsens. In aggregate, implementing a latency delay worsens total expected welfare. We find that the impact on price discovery depends on the relative abundance of speculators. If the exchange with delay technology competes against a conventional exchange, it implements a delay only if it has sufficiently low market share.

Date: 2020
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Working Paper: Order Flow Segmentation, Liquidity and Price Discovery: The Role of Latency Delays (2018)
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