Liquid speed: A micro-burst fee for low-latency exchanges

Michael Brolley and Marius Zoican

Journal of Financial Markets, 2023, vol. 64, issue C

Abstract: A micro-burst fee on liquidity-taking orders that surges during high-frequency races reduces costs associated with latency arbitrage. Moreover, micro-burst fees provide higher revenue for exchanges versus co-location subscriptions. Unlike co-location fees, micro-burst fees scale with trading activity and allow exchanges to extract higher revenues from HFTs. To ensure long-run adoption incentives for exchanges, a regulator should impose a cap on micro-burst fees; for example, a calibration suggests that liquidity improves with a micro-burst fee as low as 7.8 bps, while a Reg NMS cap on fees of 30 bps per share would improve liquidity by 75%.

Keywords: High-frequency trading; Latency arbitrage; Dynamic pricing; FinTech (search for similar items in EconPapers)
JEL-codes: G10 G14 G23 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:64:y:2023:i:c:s138641812200074x

DOI: 10.1016/j.finmar.2022.100785

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