Low-Latency Trading

56 Pages Posted: 22 Oct 2010 Last revised: 22 May 2013

See all articles by Joel Hasbrouck

Joel Hasbrouck

New York University (NYU) - Department of Finance

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management; Cornell SC Johnson College of Business

Date Written: May 22, 2013


We define low-latency activity as strategies that respond to market events in the millisecond environment, the hallmark of proprietary trading by high-frequency trading firms. We propose a new measure of low-latency activity that can be constructed from publicly-available NASDAQ data to investigate the impact of high-frequency trading on the market environment. Our measure is highly correlated with NASDAQ-constructed estimates of high-frequency trading, but it can be computed from data that are more widely-available. We use this measure to study how low-latency activity affects market quality both during normal market conditions and during a period of declining prices and heightened economic uncertainty. Our conclusion is that increased low-latency activity improves traditional market quality measures — lowering short-term volatility, decreasing spreads, and increasing displayed depth in the limit order book. Of particular importance is that our findings suggest that increased low-latency activity need not work to the detriment of long-term investors in the current market structure for U.S. equities.

Keywords: low latency, high frequency trading, HFT, market quality, algorithmic trading, algorithms

JEL Classification: G10, O33

Suggested Citation

Hasbrouck, Joel and Saar, Gideon, Low-Latency Trading (May 22, 2013). Johnson School Research Paper Series No. 35-2010, AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1695460 or http://dx.doi.org/10.2139/ssrn.1695460

Joel Hasbrouck

New York University (NYU) - Department of Finance ( email )

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Gideon Saar (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

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607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

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