The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets
71 Pages Posted: 10 Nov 2017
Date Written: September 15, 2017
We examine the introduction of an asymmetric, randomized speed bump that exempts certain limit orders, allowing low-latency liquidity providers to avoid order-flow driven adverse selection by reacting to activity on other venues. The speed bump segments order flow and increases profits for fast liquidity providers on that venue at the expense of other liquidity providers and aggregate market quality. The negative effects are concentrated in stocks more exposed to immediate adverse selection ex-ante. 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, market quality, fragmentation, adverse selection
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