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

Rotman School of Management Working Paper No. 3377346

European Finance Association 2020 Helsinki

49 Pages Posted: 26 Jul 2019 Last revised: 13 Jul 2021

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 13, 2020

Abstract

A micro-burst fee on liquidity-taking orders reduces costs associated with latency arbitrage,while providing higher revenue for exchanges versus co-location subscriptions. The fee surges during activity bursts, as high-frequency traders (HFTs) simultaneously race to market. A higher fee limits burst intensity, which reduces adverse selection and narrows spreads. Unlike co-location fees, micro-burst fees scale with trading activity and allow exchanges to extract higher revenues from HFTs. To prevent exchanges from competing profits away, and provide long-run adoption incentives, a regulator needs to impose a (relatively slack) cap on micro-burst fees. A calibration exercise suggests that a micro-burst fee as low as 7.8 basis points per share could improve liquidity while generating higher exchange revenues than co-location subscription fees.If exchanges set the micro-burst fee at the RegNMS maximum cap of 30 basis points per share,our calibration suggests that liquidity would improve 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 13, 2020). Rotman School of Management Working Paper No. 3377346, European Finance Association 2020 Helsinki, Available at SSRN: https://ssrn.com/abstract=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.org

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