Liquid Speed: Pricing Congestion on Low-Latency Exchanges

55 Pages Posted: 26 Jul 2019 Last revised: 23 Mar 2020

See all articles by Michael Brolley

Michael Brolley

Wilfrid Laurier University

Marius Zoican

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Date Written: July 24, 2019

Abstract

Trading activity surges associated with zero-sum high-frequency trader (HFT) “duels” lead exchanges to invest in excess processing capacity that remains idle 90% of the time. We build a model where exchanges charge a congestion message fee for liquidity-taking orders. The fee surges during activity bursts, as HFTs simultaneously race to market. A higher fee limits burst intensity, which reduces adverse selection, narrows spreads, and lowers resource commitment to HFT duels. If fee revenue is transferred to market-makers, liquidity improves further, but burst intensity increases. Similar results obtain if surge pricing directly applies to exchange processing capacity, rather than message congestion.

Keywords: high-frequency trading, congestion pricing, trade surges, market design

JEL Classification: G10, G14, G23

Suggested Citation

Brolley, Michael and Zoican, Marius, Liquid Speed: Pricing Congestion on Low-Latency Exchanges (July 24, 2019). Rotman School of Management Working Paper No. 3377346. Available at SSRN: https://ssrn.com/abstract=3377346

Michael Brolley

Wilfrid Laurier University ( email )

Lazaridis Hall, 4071
75 University Avenue
Waterloo, Ontario N2L 3C5
Canada

HOME PAGE: http://www.mikerostructure.com

Marius Zoican (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.mariuszoican.org

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