Latency and Asset Prices

34 Pages Posted: 9 Jan 2015 Last revised: 18 Jan 2015

See all articles by Andrei A. Kirilenko

Andrei A. Kirilenko

Imperial College London - Centre for Global Finance and Technology

Gui Lamacie

BM&F BOVESPA

Date Written: January 7, 2015

Abstract

We measure message processing time or latency inside an automated trading platform. We show that latency is a random variable that has a strong predictive power over both volatility and the volatility of volatility of a highly liquid asset over and above changes in message traffic. We argue that in automated markets, processing time contains valuable nontrade information about the price formation process. We recommend that automated trading platforms improve pre-trade price transparency by reporting characteristics of latency to market participants on an ongoing basis along with order book events, transaction prices, and trading volume.

Keywords: Latency, High Frequency Trading, Algorithmic Trading, Automated Markets, Liquidity, Volatility, Volatility of Volatility

JEL Classification: G10, G12, G13, G18

Suggested Citation

Kirilenko, Andrei A. and Lamacie, Guilherme, Latency and Asset Prices (January 7, 2015). Available at SSRN: https://ssrn.com/abstract=2546567 or http://dx.doi.org/10.2139/ssrn.2546567

Andrei A. Kirilenko (Contact Author)

Imperial College London - Centre for Global Finance and Technology ( email )

South Kensington Campus
London, SW7 2AZ
United Kingdom

Guilherme Lamacie

BM&F BOVESPA ( email )

Sao Paulo
Brazil
+55 11 97604 6274 (Phone)

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