The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets

71 Pages Posted: 10 Nov 2017

See all articles by Haoming Chen

Haoming Chen

University of New South Wales (UNSW)

Sean Foley

University of Sydney Business School

Michael A. Goldstein

Babson College - Finance Division

Thomas Ruf

University of New South Wales (UNSW)

Date Written: September 15, 2017

Abstract

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

Suggested Citation

Chen, Haoming and Foley, Sean and Goldstein, Michael A. and Ruf, Thomas, The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets (September 15, 2017). Fifth Annual Conference on Financial Market Regulation. Available at SSRN: https://ssrn.com/abstract=3068477

Haoming Chen

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Sean Foley

University of Sydney Business School ( email )

Sydney
Australia

Michael A. Goldstein

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

Thomas Ruf (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

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