In the Blink of an Eye: Exchange-to-SIP Latency and Trade Classification Accuracy

63 Pages Posted: 16 May 2023

See all articles by Craig W. Holden

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Matthew Pierson

Wharton Research Data Services (WRDS)

Jun Wu

Wharton Research Data Services (WRDS)

Date Written: May 8, 2023

Abstract

We develop two new methods for matching trades and bid-ask quotes that account for information latency in the era of fast trading. The first method adjusts for exchange-to-SIP latency. The second method constructs exchanges' Relative Best Bid and Offer (RBBO) based on exchange-to-exchange latency and data center co-locations. We test these trade classification methods using over 650 million TAQ trades matched with order executions in TAQ Integrated Feed. We find that the first method improves the Lee Ready (1991) trade classification accuracy from 86% to 92%. Our preferred method, the RBBO method, further improves accuracy by another 58 bp but is computationally expensive. Using an exogenous technological shock, we find that adjusting for latency could alter research inferences when measuring liquidity.

Keywords: Latency, Trade Classification, Exchange Network, Liquidity

JEL Classification: C15, G12, G20

Suggested Citation

Holden, Craig W. and Pierson, Matthew and Wu, Jun, In the Blink of an Eye: Exchange-to-SIP Latency and Trade Classification Accuracy (May 8, 2023). Available at SSRN: https://ssrn.com/abstract=4441422 or http://dx.doi.org/10.2139/ssrn.4441422

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

Matthew Pierson

Wharton Research Data Services (WRDS) ( email )

3819 Chestnut St
Suite 300
Philadelphia, PA 19104
United States

Jun Wu (Contact Author)

Wharton Research Data Services (WRDS) ( email )

3819 Chestnut St
Suite 300
Philadelphia, PA 19104
United States

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