Need for Speed? Exchange Latency and Liquidity

Review of Financial Studies 30 (2017), 1188--1228

52 Pages Posted: 28 May 2014 Last revised: 9 Jun 2019

See all articles by Albert J. Menkveld

Albert J. Menkveld

Vrije Universiteit Amsterdam

Marius Zoican

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Date Written: September 28, 2016

Abstract

Speeding up the exchange does not necessarily improve liquidity. On the one hand, more speed enables a high-frequency market maker (HFM) to update his quotes faster on incoming news. This reduces his payoff risk and thus 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.

Keywords: Exchange Speed, High-Frequency Trading, Information Asymmetry

JEL Classification: G11, G12, G14

Suggested Citation

Menkveld, Albert J. and Zoican, Marius, Need for Speed? Exchange Latency and Liquidity (September 28, 2016). Review of Financial Studies 30 (2017), 1188--1228, Available at SSRN: https://ssrn.com/abstract=2442690 or http://dx.doi.org/10.2139/ssrn.2442690

Albert J. Menkveld

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Marius Zoican (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.mariuszoican.com

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,237
Abstract Views
13,835
Rank
12,509
PlumX Metrics