Need for Speed? Exchange Latency and Liquidity

Albert Menkveld and Marius Zoican ()

No 14-097/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Speeding up the exchange does not necessarily improve liquidity. The price quotes of high-frequency market makers are more likely to meet speculative high-frequency "bandits", thus less likely to meet liquidity traders. The bid-ask spread is raised in response. The recursive dynamic model reveals that there is an additional spread-widening effect as market makers earn higher rents due to economies of scope from quote monitoring. Analysis of a NASDAQ-OMX speed upgrade provides supportive evidence.

Keywords: market microstructure; trading speed; information asymmetry; high-frequency trading (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2014-07-28
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (24)

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Related works:
Journal Article: Need for Speed? Exchange Latency and Liquidity (2017)
Working Paper: Need for Speed? Exchange Latency and Liquidity (2017)
Working Paper: Need for Speed? Exchange Latency and Liquidity (2016)
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