The Costs of Latency

18 Pages Posted: 22 Aug 2014

See all articles by Irene Aldridge

Irene Aldridge

AbleMarkets.com; Cornell University; BigDataFinance.org; ABLE Alpha Trading, LTD

Date Written: August 20, 2014

Abstract

We derive the economic costs of latency induced by computer technology in trading. We show that the costs of latency are negligible in their expected value, but instead manifest themselves in increased risk to investors. We also show that our theoretical predictions firmly hold when tested on market data and that: 1) Faster trading communication does not lead to arms race in normal circumstances; 2) The cost of executing a trade (slippage) with as much as 1 minute latency is zero 80% of the time for some of the commonly traded financial instruments, but may vary from instrument to instrument; 3) The maximum cost a trader is willing to bear to reduce his latency by a certain time period can be quantified explicitly for different financial instruments.

Keywords: high-frequency, trading, microstructure, networks, speed, low-latency

JEL Classification: A13, C72, D44, D71, D81, D82, D83, G28, L1

Suggested Citation

Aldridge, Irene, The Costs of Latency (August 20, 2014). Available at SSRN: https://ssrn.com/abstract=2484123 or http://dx.doi.org/10.2139/ssrn.2484123

Irene Aldridge (Contact Author)

AbleMarkets.com ( email )

New York, NY 10128
United States

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

Cornell University ( email )

Ithaca, NY 14853
United States

BigDataFinance.org ( email )

United States

ABLE Alpha Trading, LTD ( email )

New York, NY 10004
United States

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

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