Do Speed Bumps Curb Low-Latency Investment? Evidence From a Laboratory Market
40 Pages Posted: 25 Mar 2019 Last revised: 24 Aug 2020
Date Written: July 20, 2020
Exchanges implement intentional trade delays to limit the harmful impact of low-latency trading. Do such "speed bumps" curb investment in fast trading technology? Data is scarce since trading technologies are proprietary. We build an experimental trading platform where participants face speed bumps and can invest in fast trading technology. We find that asymmetric speed bumps, on average, reduce investment in speed by only 20%. Increasing the magnitude of the speed bump by one standard deviation further reduces low-latency investment by 8.33%. Finally, introducing a symmetric speed bump leads to the same investment level as no speed bump at all.
Keywords: high-frequency trading, experimental finance, speed bumps, trading technology
JEL Classification: C90, G11, G14, G40
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