Latency in Fragmented Markets
51 Pages Posted: 6 Jul 2016 Last revised: 2 Jun 2019
Date Written: April 30, 2019
I examine the impact of cross-venue latency on market quality using a model of informed trader competition in a fragmented market. As cross-venue latency decreases, liquidity and price discovery improve while the expected profits of informed traders decline. Moreover, a fall in the latency of one venue can harm liquidity at the other venue. An extension predicts that, as the informed traders consolidate or outsource trading, benefits of shorter cross-venue latency are attenuated and its harmful effects intensify. My model generates testable predictions about the effects of changes in cross-venue latency on market quality.
Keywords: latency, market fragmentation, liquidity, price discovery
JEL Classification: D4, D62, G1, G20, L1
Suggested Citation: Suggested Citation