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

43 Pages Posted: 6 Oct 2016 Last revised: 1 Apr 2019

See all articles by Andriy Shkilko

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Konstantin Sokolov

University of Memphis - Fogelman College of Business and Economics

Date Written: October 1, 2016

Abstract

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-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 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

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

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

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