Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs
53 Pages Posted: 6 Oct 2016 Last revised: 19 Feb 2018
Date Written: October 1, 2016
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: Suggested Citation