Need for Speed? International Transmission Latency, Liquidity and Volatility

58 Pages Posted: 7 Sep 2019

See all articles by Khaladdin Rzayev

Khaladdin Rzayev

London School of Economics, Systemic Risk Centre

Gbenga Ibikunle

University of Edinburgh; European Capital Markets Cooperative Research Centre

Tom Steffen

University of Geneva

Date Written: January 3, 2019

Abstract

Using a measure of the transmission latency between exchanges in Frankfurt and London and exploiting speed-inducing technological upgrades, we investigate the impact of international transmission latency on liquidity and volatility. We find that a decrease in transmission latency increases liquidity and volatility. In line with existing theoretical models, we show that the amplification of liquidity and volatility is associated with variations in adverse selection risk and aggressive trading. We then investigate the net economic effect of high latency and find that the liquidity deterioration effect of high latency dominates its volatility reducing effect. This implies that the liquidity enhancing benefit of increased trading speed in financial markets outweighs its volatility-inducing effect.

Keywords: transmission latency, microwave connection, high-frequency trading, liquidity, volatility

JEL Classification: G10, G14

Suggested Citation

Rzayev, Khaladdin and Ibikunle, Gbenga and Steffen, Tom, Need for Speed? International Transmission Latency, Liquidity and Volatility (January 3, 2019). Available at SSRN: https://ssrn.com/abstract=3447077 or http://dx.doi.org/10.2139/ssrn.3447077

Khaladdin Rzayev (Contact Author)

London School of Economics, Systemic Risk Centre ( email )

United Kingdom

Gbenga Ibikunle

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

European Capital Markets Cooperative Research Centre ( email )

Viale Pidaro 42
Pescara, 65121
Italy

Tom Steffen

University of Geneva ( email )

Geneva
Switzerland

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