Fast Trading on Fake News: The Role of Speed in Liquidity Provision

50 Pages Posted: 8 Aug 2015 Last revised: 12 Dec 2018

Date Written: December 10, 2018

Abstract

We study the consequences of information arrival for market outcomes when both high-frequency and slower traders provide liquidity. We present a model that predicts faster traders achieve a relative increase in profits obtained from liquidity provision following a fake news event through (i) avoiding adverse selection by canceling mispriced quotes, and (ii) winning the race to post updated quotes. We find strong support for these model predictions using data from the entire cross-section of securities traded on the Toronto Stock Exchange. The identification strategy is based on an unanticipated news event in which the Twitter feed of the Associated Press falsely reported a terrorist attack.

Keywords: high-frequency trading, liquidity provision, speed heterogeneity

JEL Classification: G14, G15

Suggested Citation

Baldauf, Markus and Mollner, Joshua, Fast Trading on Fake News: The Role of Speed in Liquidity Provision (December 10, 2018). Available at SSRN: https://ssrn.com/abstract=2640823 or http://dx.doi.org/10.2139/ssrn.2640823

Markus Baldauf (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Joshua Mollner

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
346
rank
84,513
Abstract Views
1,714
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information