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The Microgeographies of Global Finance: High Frequency Trading and the Construction of Information Inequality

24 Pages Posted: 1 Apr 2014  

Matthew Zook

University of Kentucky

Michael H. Grote

Frankfurt School of Finance & Management

Date Written: February 25, 2014

Abstract

Automated high frequency trading (HFT) has grown tremendously in the past twenty years and is responsible for about half of all trading activities at stock exchanges worldwide. Geography has been absolutely central to the rise of HFT due to a market design of ‘continuous trading’ that allows traders to engage in arbitrage based upon informational advantages constructed via differences in time-space compression. Enormous investments have been made in creating transmission technologies and optimizing computer architectures, all in an effort to shave milliseconds of order travel time (or latency) within and between markets. Proponents of HFT point to a number of associated benefits such as liquidity, efficiency and lower transaction costs. We show that these same advantages can be achieved by other means that also eliminate the information asymmetries and risk produced by continuous trading. We outline such an alternative market design – daily auctions – that directly addresses the fundamental role of geography in stock trading, and enables more equitable participation in stock markets.

Keywords: geography of finance, high frequency trading, location of financial trading, information inequality, time-space compression, scale

JEL Classification: G14, G15, G18

Suggested Citation

Zook, Matthew and Grote, Michael H., The Microgeographies of Global Finance: High Frequency Trading and the Construction of Information Inequality (February 25, 2014). Available at SSRN: https://ssrn.com/abstract=2401030 or http://dx.doi.org/10.2139/ssrn.2401030

Matthew Zook (Contact Author)

University of Kentucky ( email )

Lexington, KY 40506
United States

Michael H. Grote

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

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