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

58 Pages Posted: 6 Oct 2016 Last revised: 10 Mar 2020

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 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). Journal of Finance, Forthcoming, 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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