Liquid Speed: Pricing Congestion on Low-Latency Exchanges
55 Pages Posted: 26 Jul 2019 Last revised: 23 Mar 2020
Date Written: July 24, 2019
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: Suggested Citation