Need for Speed? Exchange Latency and Liquidity

Albert Menkveld and Marius Zoican

The Review of Financial Studies, 2017, vol. 30, issue 4, 1188-1228

Abstract: A faster exchange does not necessarily improve liquidity. On the one hand, speed enables a high-frequency market maker (HFM) to update quotes faster on incoming news. This reduces payoff risk and thus lowers the competitive bid-ask spread. On the other hand, HFM price quotes are more likely to meet speculative high-frequency bandits, and thus are less likely to meet liquidity traders. This raises the spread. The net effect of exchange speed depends on a security’s news-to-liquidity-trader ratio.

JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (68)

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Working Paper: Need for Speed? Exchange Latency and Liquidity (2017)
Working Paper: Need for Speed? Exchange Latency and Liquidity (2016)
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