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Low-latency trading

Joel Hasbrouck and Gideon Saar

Journal of Financial Markets, 2013, vol. 16, issue 4, 646-679

Abstract: We define low-latency activity as strategies that respond to market events in the millisecond environment, the hallmark of proprietary trading by high-frequency traders though it could include other algorithmic activity as well. We propose a new measure of low-latency activity to investigate the impact of high-frequency trading on the market environment. Our measure is highly correlated with NASDAQ-constructed estimates of high-frequency trading, but it can be computed from widely-available message data. We use this measure to study how low-latency activity affects market quality both during normal market conditions and during a period of declining prices and heightened economic uncertainty. Our analysis suggests that increased low-latency activity improves traditional market quality measures—decreasing spreads, increasing displayed depth in the limit order book, and lowering short-term volatility. Our findings suggest that given the current market structure for U.S. equities, increased low-latency activity need not work to the detriment of long-term investors.

Keywords: High-frequency trading; Limit order markets; NASDAQ; Order placement strategies; Liquidity; Market quality (search for similar items in EconPapers)
JEL-codes: G10 G20 G23 G28 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:16:y:2013:i:4:p:646-679

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