Adverse Selection, Speed Bumps and Asset Market Quality

Alasdair Brown and Fuyu Yang
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Alasdair Brown: University of East Anglia

No 70, University of East Anglia Applied and Financial Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

Abstract: Recent evidence suggests that the fastest algorithmic traders in financial markets profit at the expense of slower traders. One solution gaining traction is a `speed-bump', which introduces a delay between the time in which an order is submitted, and when it is processed. We conduct an impact evaluation of the speed bump's effectiveness on Betfair, a betting exchange, where this design has been in force for more than a decade. We find that increases in the duration of the delay led to improvements in liquidity (measured by bid-ask spreads and depth) and market quality (measured by order frequency and volume).

Date: 2015-04
New Economics Papers: this item is included in nep-cta and nep-mst
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