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
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: Suggested Citation