Abstract

http://ssrn.com/abstract=2317797
 
 

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Trading Fast and Slow: Colocation and Market Quality


Jonathan Brogaard


University of Washington - Department of Finance and Business Economics

Björn Hagströmer


Stockholm University - School of Business

Lars L. Norden


Stockholm University - School of Business

Ryan Riordan


Queen's School of Business

February 20, 2014

Finance Down Under 2014 Building on the Best from the Cellars of Finance

Abstract:     
Using data showing the activities of trading accounts with different types of colocation subscriptions at NASDAQ OMX Stockholm, we investigate the effects of trader speed. We find that colocated traders have an informational advantage relative to non-colocated participants. To assess how fast trading affects market quality, we perform an event study around an optional colocation upgrade. Participants that upgrade reduce their adverse selection costs and improve their inventory management ability, allowing them to increase their market share in liquidity provision. Both bid-ask spreads and market depth improve after the speed increase. Our results suggest that the liquidity improvements are related to the fastest traders’ increased market share and their enhanced inventory management abilities.

Number of Pages in PDF File: 60

Keywords: colocation, high-frequency trading, liquidity, fast trading, proximity services

JEL Classification: G14, G15

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Date posted: August 30, 2013 ; Last revised: March 1, 2014

Suggested Citation

Brogaard, Jonathan and Hagströmer, Björn and Norden, Lars L. and Riordan, Ryan, Trading Fast and Slow: Colocation and Market Quality (February 20, 2014). Finance Down Under 2014 Building on the Best from the Cellars of Finance. Available at SSRN: http://ssrn.com/abstract=2317797 or http://dx.doi.org/10.2139/ssrn.2317797

Contact Information

Jonathan Brogaard
University of Washington - Department of Finance and Business Economics ( email )
Box 353200
Seattle, WA 98195
United States
Björn Hagströmer (Contact Author)
Stockholm University - School of Business ( email )
Stockholm, SE-106 91
Sweden
Lars L. Nordén
Stockholm University - School of Business ( email )
Stockholm, 106 91
Sweden
Ryan Riordan
Queen's School of Business ( email )
Queen's University
Kingston
Ontario, Ontario K7L 3N6
Canada

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