Latency Arbitrage When Markets Become Faster

Riksbank Research Paper Series No. 162

Sveriges Riksbank Working Paper Series No. 338

32 Pages Posted: 26 Jan 2018

See all articles by Burton Hollifield

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Patrik Sandås

University of Virginia

Andrew Todd

University of Virginia

Date Written: May 2017

Abstract

We measure the incidence of latency arbitrage for cross-listed stocks around the time of an exogenous shock that made the markets faster. Our sample is from NASDAQ Nordic and consists of Nordic blue chip firms listed and traded in multiple markets. We document a sharp decline in the incidence of cross-market arbitrage opportunities across the Nordic markets for cross-listed stocks from 2009 to 2010 and later. Over the five year sample period 77% of the observed cross-market arbitrage opportunities occurred in 2009 and 13% in 2010 and the remaining 10% spread over the last three years. The inside spread declines by, on average, 14.5 basis points or 53% from 2009 to 2013. Our results point to significant improvements in market efficiency and market quality as a result of the switch to a faster trading system.

Keywords: Cross-market Arbitrage, Information Efficiency, High Frequency Trading

JEL Classification: G10, G14, G15

Suggested Citation

Hollifield, Burton and Sandas, Patrik and Todd, Andrew, Latency Arbitrage When Markets Become Faster (May 2017). Riksbank Research Paper Series No. 162. Available at SSRN: https://ssrn.com/abstract=2996990 or http://dx.doi.org/10.2139/ssrn.2996990

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-6505 (Phone)
(412) 268-6837 (Fax)

Patrik Sandas (Contact Author)

University of Virginia ( email )

McIntire School of Commerce
Charlottesville, VA 22904
United States
1-434-243-2289 (Phone)

HOME PAGE: http://www.comm.virginia.edu/faculty_research/staff_directory/sandas.html

Andrew Todd

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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