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Need for Speed? Exchange Latency and Liquidity

Author

Listed:
  • Albert J. Menkveld

    (VU University Amsterdam)

  • Marius A. Zoican

    (VU University Amsterdam)

Abstract

Speeding up the exchange does not necessarily improve liquidity. The price quotes of high-frequency market makers are more likely to meet speculative high-frequency "bandits", thus less likely to meet liquidity traders. The bid-ask spread is raised in response. The recursive dynamic model reveals that there is an additional spread-widening effect as market makers earn higher rents due to economies of scope from quote monitoring. Analysis of a NASDAQ-OMX speed upgrade provides supportive evidence.

Suggested Citation

  • Albert J. Menkveld & Marius A. Zoican, 2014. "Need for Speed? Exchange Latency and Liquidity," Tinbergen Institute Discussion Papers 14-097/IV, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140097
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    File URL: https://papers.tinbergen.nl/14097.pdf
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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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