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

41 Pages Posted: 24 Jul 2017  

Michael Brolley

Wilfrid Laurier University

David A. Cimon

Bank of Canada

Date Written: July 19, 2017

Abstract

Latency delays – known as "speed bumps" – are an intentional slowing of order flow by exchanges. Supporters contend that delays protect market makers from high-frequency arbitrage, while opponents warn that delays promote "quote fading" by market makers. We construct a model of informed trading in a fragmented market, where one market operates a conventional order book, and the other imposes a latency delay on market orders. We show that informed investors migrate to the conventional exchange, widening the quoted spread; the quoted spread narrows at the delayed exchange. The overall market quality impact depends on the nature of the delay: short latency delays lead to improved trading costs for liquidity investors, but worsening price discovery; sufficiently long delays improve both.

Keywords: Latency delays, speed bumps, market fragmentation

JEL Classification: G14, G18

Suggested Citation

Brolley, Michael and Cimon, David A., Order Flow Segmentation, Liquidity and Price Discovery: The Role of Latency Delays (July 19, 2017). Available at SSRN: https://ssrn.com/abstract=3005738

Michael Brolley (Contact Author)

Wilfrid Laurier University ( email )

Frank Peters Building
75 University Avenue
Waterloo, Ontario N2L 3C5
Canada

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

David Cimon

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

HOME PAGE: http://sites.google.com/site/dcimon

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