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Fast traders make a quick buck: The role of speed in liquidity provision

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  • Baldauf, Markus
  • Mollner, Joshua

Abstract

In modern public equity markets, liquidity is provided by a heterogeneous set of traders with vastly different speeds. We study the consequences of information arrival in such a setting. We present a model that predicts faster traders achieve a relative increase in profits obtained from liquidity provision following information events through (i) avoiding adverse selection by canceling mispriced quotes, and (ii) winning the race to post updated quotes. We also find strong support for these model predictions using data from the Toronto Stock Exchange. The identification strategy is based on an unanticipated “fake news” event in which the Twitter feed of the Associated Press falsely reported a terrorist attack.

Suggested Citation

  • Baldauf, Markus & Mollner, Joshua, 2022. "Fast traders make a quick buck: The role of speed in liquidity provision," Journal of Financial Markets, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:finmar:v:58:y:2022:i:c:s1386418121000033
    DOI: 10.1016/j.finmar.2021.100621
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    Cited by:

    1. Brolley, Michael & Zoican, Marius, 2023. "Liquid speed: A micro-burst fee for low-latency exchanges," Journal of Financial Markets, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    High-frequency trading; Liquidity provision; Speed heterogeneity;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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