Need for Speed? Exchange Latency and Liquidity

Albert Menkveld and Marius Zoican

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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.

Keywords: Microstructure; High frequency trading; Exchange latency; G11; G12; G14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (54)

Published in The Review of Financial Studies, 2017, 30 (4), ⟨10.1093/rfs/hhx006⟩

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Journal Article: Need for Speed? Exchange Latency and Liquidity (2017)
Working Paper: Need for Speed? Exchange Latency and Liquidity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01501352

DOI: 10.1093/rfs/hhx006

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