Need for Speed? Exchange Latency and Liquidity

Review of Financial Studies (Forthcoming)

52 Pages Posted: 28 May 2014 Last revised: 23 Mar 2017

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Marius Zoican

University of Toronto - Finance Area

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 (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2442690 or http://dx.doi.org/10.2139/ssrn.2442690

Albert J. Menkveld

VU Amsterdam ( email )

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

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Marius Zoican (Contact Author)

University of Toronto - Finance Area ( email )

105 St George Street
Toronto, Ontario M5S 3E6
Canada

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

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