Need for Speed? International Transmission Latency, Liquidity and Volatility
58 Pages Posted: 7 Sep 2019
Date Written: January 3, 2019
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: Suggested Citation