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

51 Pages Posted: 6 Oct 2016  

Andriy Shkilko

Wilfrid Laurier University

Konstantin Sokolov

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

Date Written: October 2016

Abstract

In modern markets, trading firms spend generously to gain a speed advantage over their rivals. The marketplace that results from this rivalry is characterized by speed differentials, whereby some traders are faster than others. Is such a marketplace optimal? To answer this question, we study a series of exogenous weather-related episodes that temporarily remove speed advantages of the fastest traders by disrupting their microwave networks. During these episodes, adverse selection declines accompanied by improved liquidity and reduced volatility. Liquidity improvement is larger than the decline in adverse selection consistent with the emergence of latent liquidity and enhanced competition among liquidity suppliers. The results are confirmed in an event-study setting, whereby a new business model adopted by one of the technology providers reduces speed differentials among traders, resulting in liquidity improvements.

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 2016). Available at SSRN: https://ssrn.com/abstract=2848562

Andriy Shkilko (Contact Author)

Wilfrid Laurier University ( email )

SBE 3255
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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