The speed premium: high-frequency trading and the cost of capital

Matteo Aquilina, Gbenga Ibikunle, Khaladdin Rzayev and Xuesi Wang

No 1290, BIS Working Papers from Bank for International Settlements

Abstract: When trading in financial markets reaches light speed, does the real economy slow down? Using co-location and latency improvement upgrades at NASDAQ as natural experiments, we find that, on average, high frequency trading (HFT) leads to higher cost of capital. However, the impact is not uniform. HFT raises the cost of capital for low-beta stocks by amplifying their systematic risk, as HFT's correlated trading strategies make these stocks more responsive to market-wide information. For the most liquid stocks, HFT reduces the cost of capital by lowering the liquidity premium required by investors. A complementary test using data from the unfragmented Hong Kong market shows that these causal effects are not due to market fragmentation and persist across countries and market structures. Our results demonstrate that HFT's real economic effects are heterogeneous across stock characteristics, with important implications for financial market regulation and policy design.

Keywords: high frequency trading; cost of capital; financial innovation; liquidity; systematic risk (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2025-09
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