High-frequency trading, geographical concerns and the curvature of the Earth

For high-frequency traders, fragmentation, information, speed and proximity to markets matter. On today’s financial markets each nanosecond may count; therefore, an arms race is more likely as traders, venues or investors compete to see who can be fastest. The theoretical literature also demonstrates that fast traders can cause more adverse selection against slower traders and can impair long-run asset price informativeness. In this set-up, regulators and empiricists are now facing major challenges. Most evidence suggests that high-speed trading has led to improvements in liquidity and price discovery. Trading on advance information is nonetheless significant. Finally, the “slice and dice” trading strategy implemented by institutional investors does not seem fully appropriate to avoid the risk of detection by fast traders. Indeed, if, during the first hour following the order submission, high-speed traders act as market makers, they then increase trading costs for the institutional trader.