Risk and Return in High-Frequency Trading
82 Pages Posted: 6 May 2014 Last revised: 10 Jan 2018
Date Written: November 14, 2017
We study performance and competition among high-frequency traders (HFTs). We construct measures of latency and find that differences in relative latency account for large differences in HFTs’ trading performance. HFTs that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.
Keywords: high-frequency trading, low latency, market microstructure
JEL Classification: G10, G19
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