Download this Paper Open PDF in Browser

Informed Trading in a Low-Latency Limit Order Market

51 Pages Posted: 3 Jan 2018  

Michael Brolley

Wilfrid Laurier University

Katya Malinova

University of Toronto

Date Written: December 9, 2017

Abstract

We provide a novel framework of a low-latency limit order market, where informed and liquidity investors compete with a professional liquidity provider who has a monitoring advantage. We apply our model to study the impact of trading frequency and transaction costs on liquidity, trading volume, and trader welfare. Independent of trading frequency, a reduction in exogenous transaction costs leads to more market orders (over limit orders), higher volume, and a larger volume of intermediated trades. Taken together, an increase in trading frequency leads to higher volume and welfare only if exogenous costs decline sufficiently fast; otherwise volume and welfare fall.

Keywords: Limit Order Book, Informed Trading, Transaction Costs, Low-Latency Trading

JEL Classification: G10, G14

Suggested Citation

Brolley, Michael and Malinova, Katya, Informed Trading in a Low-Latency Limit Order Market (December 9, 2017). Available at SSRN: https://ssrn.com/abstract=3095649

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

Katya Malinova

University of Toronto ( email )

Department of Statistical Sciences
Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://individual.utoronto.ca/kmalinova/

Paper statistics

Downloads
18
Abstract Views
47