Liquid speed: A micro-burst fee for low-latency exchanges

62 Pages Posted: 26 Jul 2019 Last revised: 26 Jul 2022

See all articles by Michael Brolley

Michael Brolley

Wilfrid Laurier University - Lazaridis School of Business and Economics

Marius Zoican

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

Date Written: July 25, 2022

Abstract

A micro-burst fee on liquidity-taking orders that surges during high-frequency races reduces costs associated with latency arbitrage. Moreover, micro-burst fees provide higher revenue for exchanges versus co-location subscriptions. Unlike co-location fees, micro-burst fees scale with trading activity and allow exchanges to extract higher revenues from HFTs. To ensure long-run adoption incentives for exchanges, a regulator should impose a cap on micro-burst fees; for example, a calibration suggests that liquidity improves with a micro-burst fee as low as 7.8 basis points, while a RegNMS cap on fees of 30 basis points per share would improve liquidity by 75%.

Keywords: high-frequency trading, latency arbitrage, dynamic pricing, market design, FinTech

JEL Classification: G10, G14, G23

Suggested Citation

Brolley, Michael and Zoican, Marius, Liquid speed: A micro-burst fee for low-latency exchanges (July 25, 2022). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3377346 or http://dx.doi.org/10.2139/ssrn.3377346

Michael Brolley

Wilfrid Laurier University - Lazaridis School of Business and Economics ( 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.com

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