Abstract

http://ssrn.com/abstract=2317797
 
 

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Trading Fast and Slow: Colocation and Liquidity


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

August 28, 2014

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

Abstract:     
We exploit an optional colocation upgrade at NASDAQ OMX Stockholm to assess how speed affects market liquidity. Liquidity improves for the overall market and even for non-colocated trading entities. We find that the upgrade is pursued mainly by market-maker-type participants. Those that upgrade use their enhanced speed to reduce their exposure to adverse selection and to relax their inventory constraints. In particular, the upgraded trading entities remain competitive at the best bid and offer even when they are inventory constrained. Our results suggest that increasing the speed of market making participants can have benefits for market liquidity.

Number of Pages in PDF File: 53

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: August 30, 2014

Suggested Citation

Brogaard, Jonathan and Hagströmer, Björn and Norden, Lars L. and Riordan, Ryan, Trading Fast and Slow: Colocation and Liquidity (August 28, 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 353226
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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