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

52 Pages Posted: 24 Jul 2017 Last revised: 17 Jun 2018

Michael Brolley

Wilfrid Laurier University

David Cimon

Bank of Canada

Date Written: March 27, 2018

Abstract

Latency delays—known as “speed bumps”—slow the execution of orders 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. While liquidity improves at the delayed exchange and overall exchange volume increases, the delay concentrates informed trading at the conventional exchange, where liquidity worsens. This segmentation may improve price discovery when the frequency of liquidity trading is relatively high, at the expense of lower investor welfare; however, the reverse is true for relatively low liquidity trading.

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

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

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

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