Trading Fast and Slow: Colocation and Liquidity

Review of Financial Studies, Forthcoming

57 Pages Posted: 30 Aug 2013 Last revised: 19 Jun 2020

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Björn Hagströmer

Stockholm University - Stockholm Business School

Lars L. Norden

Stockholm University - Stockholm Business School

Ryan Riordan

Queen's University - Smith School of Business

Date Written: August 5, 2015

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 noncolocated trading entities. We find that the upgrade is pursued mainly by participants who engage in market making. 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 their inventories are in their top decile. Our results suggest that increasing the speed of market-making participants benefit market liquidity.

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

JEL Classification: G14, G15, L10

Suggested Citation

Brogaard, Jonathan and Hagströmer, Björn and Nordén, Lars L. and Riordan, Ryan, Trading Fast and Slow: Colocation and Liquidity (August 5, 2015). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2317797 or http://dx.doi.org/10.2139/ssrn.2317797

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

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

Björn Hagströmer (Contact Author)

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

Lars L. Nordén

Stockholm University - Stockholm Business School ( email )

Sweden

Ryan Riordan

Queen's University - Smith School of Business ( email )

Smith School of Business, Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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