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Need for Speed? Exchange Latency and Liquidity

Author

Listed:
  • Albert Menkveld

    (VU - Vrije Universiteit Amsterdam [Amsterdam])

  • Marius Andrei Zoican

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

Speeding up the exchange has a non-trivial effect on liquidity. On the one hand, more speed enables high-frequency market makers (HFMs) to update their quotes more quickly on incoming news. This reduces adverse-selection cost and lowers the competitive bid-ask spread. On the other hand, HFM price quotes are more likely to meet speculative high-frequency "bandits," thus less likely to meet liquidity traders. This raises the spread. The net effect depends on a security's news-to-liquidity-trader ratio. Empirical analysis of a NASDAQ-OMX speed upgrade shows that a faster market can indeed raise the spread and thus lower liquidity.

Suggested Citation

  • Albert Menkveld & Marius Andrei Zoican, 2016. "Need for Speed? Exchange Latency and Liquidity," Working Papers hal-01253615, HAL.
    • Handle: RePEc:hal:wpaper:hal-01253615
    Note: View the original document on HAL open archive server: https://hal.science/hal-01253615
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    References listed on IDEAS

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    More about this item

    Keywords

    market microstructure; trading speed; information asymmetry; high frequency trading;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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