Liquid speed: A micro-burst fee for low-latency exchanges
62 Pages Posted: 26 Jul 2019 Last revised: 26 Jul 2022
Date Written: July 25, 2022
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: Suggested Citation