Abstract

http://ssrn.com/abstract=1924991
 
 

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Strategic Liquidity Supply in a Market with Fast and Slow Traders


Thomas H. McInish


University of Memphis - Fogelman College of Business and Economics

James Upson


University of Texas at El Paso

March 1, 2012


Abstract:     
Modern equity markets have both fast traders such as dealers, market makers, and high frequency traders and slow traders such as retail clients. We model and show empirically that latency differences allow fast liquidity suppliers to pick off slow liquidity demanders at prices inferior to the NBBO. This trading strategy is highly profitable for the fast traders. We estimate that the fast traders earn more than $233 million per year at the expense of the slow traders. Investigating the decrease in NYSE latency on 10 March 2010, we also show that when this market became faster, execution quality improved markedly for fast liquidity demanders, but improved only minimally for slow liquidity demanders.

Number of Pages in PDF File: 49

Keywords: Regulation NMS, Limit Order, Quote Update, Trade Execution Quality

JEL Classification: G14, G18, G19

working papers series


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Date posted: September 9, 2011 ; Last revised: March 19, 2012

Suggested Citation

McInish, Thomas H. and Upson, James, Strategic Liquidity Supply in a Market with Fast and Slow Traders (March 1, 2012). Available at SSRN: http://ssrn.com/abstract=1924991 or http://dx.doi.org/10.2139/ssrn.1924991

Contact Information

Thomas H. McInish
University of Memphis - Fogelman College of Business and Economics ( email )
Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)
James Upson (Contact Author)
University of Texas at El Paso ( email )
500 West University
El Paso, TX 79968-0545
United States
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References:  26
Citations:  5

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