Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs

53 Pages Posted: 6 Oct 2016 Last revised: 19 Feb 2018

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Konstantin Sokolov

Rochester Institute of Technology (RIT) - Saunders College of Business

Date Written: October 1, 2016

Abstract

The modern marketplace is 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. We examine these effects by studying a series of exogenous weather-related episodes that temporarily remove the speed advantages of the fastest traders by disrupting their microwave networks. The disruptions are associated with lower adverse selection, trading costs and volatility as well as the emergence of latent liquidity. The results are consistent with theory models suggesting that speed differentials result in greater adverse selection of liquidity suppliers.

Keywords: Liquidity, Speed Differentials, Microwave Connectivity

JEL Classification: G10, G14

Suggested Citation

Shkilko, Andriy and Sokolov, Konstantin, Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs (October 1, 2016). Available at SSRN: https://ssrn.com/abstract=2848562 or http://dx.doi.org/10.2139/ssrn.2848562

Andriy Shkilko (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

Konstantin Sokolov

Rochester Institute of Technology (RIT) - Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

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