Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs
43 Pages Posted: 6 Oct 2016 Last revised: 1 Apr 2019
Date Written: October 1, 2016
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: Suggested Citation