Order Flow Segmentation, Liquidity and Price Discovery: The Role of Latency Delays

55 Pages Posted: 24 Jul 2017 Last revised: 3 Oct 2018

See all articles by Michael Brolley

Michael Brolley

Wilfrid Laurier University

David Cimon

Wilfrid Laurier University - School of Business & Economics

Date Written: March 27, 2018

Abstract

Latency delays intentionally slow order execution at an exchange, often to protect market makers against latency arbitrage. We study informed trading in a fragmented market, where one exchange introduces a latency delay on market orders. Liquidity improves at the delayed exchange, as informed traders emigrate to the conventional exchange, where liquidity worsens. When the frequency of liquidity trading is high, price discovery improves, at the expense of lower investor welfare; the reverse is true for infrequent liquidity trading. If the exchange with delay technology competes against a conventional exchange, they implement a delay only for sufficiently low market share.

Keywords: Latency delays, speed bumps, market fragmentation, asymmetric information

JEL Classification: G14, G18

Suggested Citation

Brolley, Michael and Cimon, David, Order Flow Segmentation, Liquidity and Price Discovery: The Role of Latency Delays (March 27, 2018). Available at SSRN: https://ssrn.com/abstract=3005738 or http://dx.doi.org/10.2139/ssrn.3005738

Michael Brolley (Contact Author)

Wilfrid Laurier University ( email )

Lazaridis Hall, 4071
75 University Avenue
Waterloo, Ontario N2L 3C5
Canada

HOME PAGE: http://www.mikerostructure.com

David Cimon

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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