A Tale of Two Cities - Inter-Market Latency, Market Integration, and Market Quality

44 Pages Posted: 29 Oct 2019

See all articles by Satchit Sagade

Satchit Sagade

Goethe University Frankfurt - Department of Finance; Leibniz Institute for Financial Research SAFE

Stefan Scharnowski

University of Mannheim

Erik Theissen

University of Mannheim - Finance Area

Christian Westheide

University of Vienna - Department of Finance; Leibniz Institute for Financial Research SAFE

Date Written: April 26, 2019

Abstract

We study the introduction of a microwave link between Frankfurt and London and identify its effects on German stocks that trade in both locations using French firms that trade only in London as the control group. We find that the link improves the integration between the two markets as evidenced by a reduction in arbitrage opportunities. The effects on market quality differ across stocks as high-frequency traders strategically utilize their speed advantage to supply or consume liquidity. In London, mid cap stocks benefit from increased liquidity provision whereas order flow for large stocks becomes more toxic. London's increased competitiveness for mid cap stocks also translates into an increase in its information share, while the information shares of large cap stocks are unchanged. These results suggest that market integration differently affects investors based on their speed advantage, trading venues based on their level of competitiveness, and stocks based on their size.

Suggested Citation

Sagade, Satchit and Scharnowski, Stefan and Theissen, Erik and Westheide, Christian, A Tale of Two Cities - Inter-Market Latency, Market Integration, and Market Quality (April 26, 2019). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3475442 or http://dx.doi.org/10.2139/ssrn.3475442

Satchit Sagade (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany
+49 69 798 30085 (Phone)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 30085 (Phone)

Stefan Scharnowski

University of Mannheim ( email )

L 7, 3-5
Mannheim, 68161
Germany

Erik Theissen

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Christian Westheide

University of Vienna - Department of Finance ( email )

Bruennerstrasse 72
Vienna, 1210
Austria

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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