Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs
58 Pages Posted: 6 Oct 2016 Last revised: 10 Mar 2020
Date Written: October 1, 2016
Modern markets are characterized by speed differentials, with some traders being fractions of a second faster than others. Theory models suggest that such differentials may have both positive and negative effects on liquidity and gains from trade. We examine these effects by studying a series of exogenous weather episodes that temporarily remove the speed advantages of the fastest traders by disrupting their microwave networks. The disruptions are associated with lower adverse selection and lower trading costs. In a separate analysis, we show that a long term removal of speed differentials results in similar effects and also increases gains from trade.
Keywords: Liquidity, Gains from Trade, Speed Differentials, Microwave Connectivity
JEL Classification: G10, G14
Suggested Citation: Suggested Citation