The Fast and the Furious: Exchange Latency and Ever-fast Trading

69 Pages Posted: 23 Sep 2020 Last revised: 12 Jul 2022

See all articles by Xuezhong He

Xuezhong He

Xi'an Jiaotong-Liverpool University (XJTLU)

Junqing Kang

Sun Yat-sen University (SYSU) - Lingnan (University) College

Xuan Zhou

Beijing Jiaotong University - School of Economics and Management

Date Written: July 12, 2022

Abstract

This paper examines spillover channels of fast trading technology to the equilibrium speed demand of speculators and speed supply by exchanges. As the speed technology of speculators advances, more speculators rush to be fast and to trade faster in order to benefit from the first-mover advantages. This generates a negative externality of excessive speed investment and deteriorates profit for both fast and slow speculators. As the speed technology of exchanges advances, faster exchanges make fast speculators more concentrated and faster in equilibrium, reducing the fraction of ever-fast speculators. This fast and furious trading can increase the deadweight loss of speed investment and reduce price informativeness. Policy-makers aiming to improve price discovery and reduce costly speed investment may find a mismatch between their desired exchange speed and the equilibrium speed supplied by the exchange, echoing the concerns of market failure on speed arms races.

Keywords: Exchange latency, high-frequency trading, speed hierarchy

JEL Classification: G12, G14, G18, D41, D44, D47, D82, D83, D84

Suggested Citation

He, Xue-Zhong 'Tony' and Kang, Junqing and Zhou, Xuan, The Fast and the Furious: Exchange Latency and Ever-fast Trading (July 12, 2022). Available at SSRN: https://ssrn.com/abstract=3681157 or http://dx.doi.org/10.2139/ssrn.3681157

Xue-Zhong 'Tony' He (Contact Author)

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

Junqing Kang

Sun Yat-sen University (SYSU) - Lingnan (University) College ( email )

135 Xingang Xi Road
Guangzhou, Guangzhou 510275
China

Xuan Zhou

Beijing Jiaotong University - School of Economics and Management ( email )

China

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