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The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets

66 Pages Posted: 28 Oct 2016 Last revised: 20 Nov 2017

Haoming Chen

University of New South Wales (UNSW)

Sean Foley

University of Sydney

Michael A. Goldstein

Babson College - Finance Division

Thomas Ruf

University of New South Wales (UNSW)

Date Written: November 18, 2017

Abstract

We examine the introduction of an asymmetric, randomized speed bump that allows low-latency liquidity providers to avoid order-flow driven adverse selection by reacting to activity on other venues. The speed bump segments order flow and increases profits for fast liquidity providers on that venue at the expense of other liquidity providers and aggregate market quality. The negative effects are concentrated in stocks more exposed to immediate adverse selection ex-ante. Our findings have implications for speed differentials and the regulation of market linkages across fragmented trading venues.

Keywords: Market Design, Speed Bump, Quote Fade, Liquidity Provision

JEL Classification: G10, G14, G24, G28, D82

Suggested Citation

Chen, Haoming and Foley, Sean and Goldstein, Michael A. and Ruf, Thomas, The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets (November 18, 2017). Available at SSRN: https://ssrn.com/abstract=2860359 or http://dx.doi.org/10.2139/ssrn.2860359

Haoming Chen

University of New South Wales (UNSW) ( email )

Sydney, NSW 2052
Australia

Sean Foley

University of Sydney ( email )

Sydney
Australia

Michael Goldstein

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

Thomas Ruf (Contact Author)

University of New South Wales (UNSW) ( email )

Sydney, NSW 2052
Australia

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