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

57 Pages Posted: 28 Oct 2016 Last revised: 9 May 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: April 6, 2017

Abstract

We examine the introduction of an asymmetric, randomized speed bump which provides faster participants with guaranteed speed advantages on one venue but not others. A selective order processing delay for marketable orders allows low-latency liquidity providers to avoid order-flow driven adverse selection by reacting to activity on other venues. The speed bump increases profits for liquidity providers on that venue but negatively impacts aggregate market quality, increasing both market-wide costs for liquidity demanders and consolidated order book fragility. Our findings have implications for the speed bump debate and speed differentials more generally, as well as 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 (April 6, 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 A. 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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