IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v46y2016icp257-265.html
   My bibliography  Save this article

Latency reduction and market quality: The case of the Australian Stock Exchange

Author

Listed:
  • Murray, Hamish
  • Pham, Thu Phuong
  • Singh, Harminder

Abstract

This study investigates the role of latency in market quality in the Australia Securities Exchange following the introduction of the Integrated Trading Platform (ITS) and ASXTrade. We find that the reduction in system latency from 70ms to 30ms (ITS) improved liquidity. However, the lower latency has not had a long-lasting downward effect on spreads, as there was no discernible reduction in trading costs when institutional traders already had access to lower-latency co-locations. We contribute to the literature by reporting that low latency improves market liquidity, but privileged participants that have access to trading information prior to others may induce greater information asymmetry and adverse selection.

Suggested Citation

  • Murray, Hamish & Pham, Thu Phuong & Singh, Harminder, 2016. "Latency reduction and market quality: The case of the Australian Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 257-265.
    • Handle: RePEc:eee:finana:v:46:y:2016:i:c:p:257-265
    DOI: 10.1016/j.irfa.2015.09.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521915001489
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2015.09.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thierry Foucault & Ailsa Röell & Patrik Sandås, 2003. "Market Making with Costly Monitoring: An Analysis of the SOES Controversy," The Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 345-384.
    2. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2011. "Recent trends in trading activity and market quality," Journal of Financial Economics, Elsevier, vol. 101(2), pages 243-263, August.
    3. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. "An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-1689, December.
    4. Bessembinder, Hendrik, 2003. "Issues in assessing trade execution costs," Journal of Financial Markets, Elsevier, vol. 6(3), pages 233-257, May.
    5. Hendershott, Terrence & Riordan, Ryan, 2013. "Algorithmic Trading and the Market for Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(4), pages 1001-1024, August.
    6. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2013. "Liquidity Cycles and Make/Take Fees in Electronic Markets," Journal of Finance, American Finance Association, vol. 68(1), pages 299-341, February.
    7. Copeland, Thomas E & Galai, Dan, 1983. "Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-1469, December.
    8. Alex Frino & Vito Mollica & Robert I. Webb, 2014. "The Impact of Co‐Location of Securities Exchanges' and Traders' Computer Servers on Market Liquidity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(1), pages 20-33, January.
    9. Goettler, Ronald L. & Parlour, Christine A. & Rajan, Uday, 2009. "Informed traders and limit order markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 67-87, July.
    10. Hendershott, Terrence & Moulton, Pamela C., 2011. "Automation, speed, and stock market quality: The NYSE's Hybrid," Journal of Financial Markets, Elsevier, vol. 14(4), pages 568-604, November.
    11. Easley, David & Hendershott, Terrence & Ramadorai, Tarun, 2014. "Leveling the trading field," Journal of Financial Markets, Elsevier, vol. 17(C), pages 65-93.
    12. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    13. Michael Goldstein & Tina Viljoen & P. Joakim Westerholm & Hui Zheng, 2014. "Algorithmic Trading, Liquidity, and Price Discovery: An Intraday Analysis of the SPI 200 Futures," The Financial Review, Eastern Finance Association, vol. 49(2), pages 245-270, May.
    14. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, February.
    15. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
    16. Terrence Hendershott & Charles M. Jones, 2005. "Island Goes Dark: Transparency, Fragmentation, and Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 743-793.
    17. Garvey, Ryan & Wu, Fei, 2010. "Speed, distance, and electronic trading: New evidence on why location matters," Journal of Financial Markets, Elsevier, vol. 13(4), pages 367-396, November.
    18. Michael Kearns & Alex Kulesza & Yuriy Nevmyvaka, 2010. "Empirical Limitations on High Frequency Trading Profitability," Papers 1007.2593, arXiv.org, revised Sep 2010.
    19. Alain P. Chaboud & Benjamin Chiquoine & Erik Hjalmarsson & Clara Vega, 2014. "Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 69(5), pages 2045-2084, October.
    20. Ready, Mark J, 1999. "The Specialist's Discretion: Stopped Orders and Price Improvement," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1075-1112.
    21. Stoll, Hans R. & Schenzler, Christoph, 2006. "Trades outside the quotes: Reporting delay, trading option, or trade size?," Journal of Financial Economics, Elsevier, vol. 79(3), pages 615-653, March.
    22. Jonathan Brogaard & Björn Hagströmer & Lars Nordén & Ryan Riordan, 2015. "Trading Fast and Slow: Colocation and Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 28(12), pages 3407-3443.
    23. Giovanni Cespa & Thierry Foucault, 2014. "Sale of Price Information by Exchanges: Does It Promote Price Discovery?," Management Science, INFORMS, vol. 60(1), pages 148-165, January.
    24. Bessembinder, Hendrik, 2003. "Trade Execution Costs and Market Quality after Decimalization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(4), pages 747-777, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhou, Hao & Elliott, Robert J. & Kalev, Petko S., 2019. "Information or noise: What does algorithmic trading incorporate into the stock prices?," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 27-39.
    2. Le, Anh Tu & Le, Thai-Ha & Liu, Wai-Man & Fong, Kingsley Y., 2020. "Multiple duration analyses of dynamic limit order placement strategies and aggressiveness in a low-latency market environment," International Review of Financial Analysis, Elsevier, vol. 72(C).
    3. Zhou, Hao & Kalev, Petko S. & Frino, Alex, 2020. "Algorithmic trading in turbulent markets," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    4. Zhou, Hao & Kalev, Petko S., 2019. "Algorithmic and high frequency trading in Asia-Pacific, now and the future," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 186-207.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Thierry Foucault & Roman Kozhan & Wing Wah Tham, 2017. "Toxic Arbitrage," The Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1053-1094.
    2. Pham, Manh Cuong & Anderson, Heather Margot & Duong, Huu Nhan & Lajbcygier, Paul, 2020. "The effects of trade size and market depth on immediate price impact in a limit order book market," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).
    3. Gerig, Austin & Michayluk, David, 2017. "Automated liquidity provision," Pacific-Basin Finance Journal, Elsevier, vol. 45(C), pages 1-13.
    4. Ekinci, Cumhur & Ersan, Oğuz, 2022. "High-frequency trading and market quality: The case of a “slightly exposed” market," International Review of Financial Analysis, Elsevier, vol. 79(C).
    5. Ryan Garvey & Tao Huang & Fei Wu, 2021. "Is faster or slower trading better? An examination of order type execution speed and costs," European Financial Management, European Financial Management Association, vol. 27(2), pages 326-363, March.
    6. Hoffmann, Peter, 2014. "A dynamic limit order market with fast and slow traders," Journal of Financial Economics, Elsevier, vol. 113(1), pages 156-169.
    7. Hung, Pi-Hsia & Lien, Donald, 2019. "Trading aggressiveness, order execution quality, and stock price movements: Evidence from the Taiwan stock exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 60(C), pages 231-251.
    8. Zhou, Hao & Kalev, Petko S. & Frino, Alex, 2020. "Algorithmic trading in turbulent markets," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    9. Hoffmann, Peter, 2012. "A dynamic limit order market with fast and slow traders," MPRA Paper 39855, University Library of Munich, Germany.
    10. Ben Omrane, Walid & Welch, Robert, 2016. "Tick test accuracy in foreign exchange ECN markets," Research in International Business and Finance, Elsevier, vol. 37(C), pages 135-152.
    11. Chordia, Tarun & Miao, Bin, 2020. "Market efficiency in real time: Evidence from low latency activity around earnings announcements," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    12. Manahov, Viktor, 2016. "A note on the relationship between high-frequency trading and latency arbitrage," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 281-296.
    13. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    14. Aggarwal, Nidhi & Panchapagesan, Venkatesh & Thomas, Susan, 2023. "When is the order-to-trade ratio fee effective?," Journal of Financial Markets, Elsevier, vol. 62(C).
    15. Oliver Linton & Soheil Mahmoodzadeh, 2018. "Implications of High-Frequency Trading for Security Markets," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 237-259, August.
    16. Hoffmann, Peter, 2012. "A dynamic limit order market with fast and slow traders," MPRA Paper 44621, University Library of Munich, Germany, revised Jan 2013.
    17. Tian, Xiao & Do, Binh & Duong, Huu Nhan & Kalev, Petko S., 2015. "Liquidity provision and informed trading by individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 143-162.
    18. Jain, Pankaj K. & Jain, Pawan & McInish, Thomas H., 2016. "Does high-frequency trading increase systemic risk?," Journal of Financial Markets, Elsevier, vol. 31(C), pages 1-24.
    19. Markus Baldauf & Joshua Mollner, 2020. "High‐Frequency Trading and Market Performance," Journal of Finance, American Finance Association, vol. 75(3), pages 1495-1526, June.
    20. Suchismita Mishra & Le Zhao, 2021. "Order Routing Decisions for a Fragmented Market: A Review," JRFM, MDPI, vol. 14(11), pages 1-32, November.

    More about this item

    Keywords

    Latency; Spreads; ASXTrade; ITS; Market liquidity;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:46:y:2016:i:c:p:257-265. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.