Need for Speed? Exchange Latency and Liquidity

Preprint
Publisher Website
Google Scholar
  • 1 January 2017
    • preprint
      • Published in RePEc
Abstract
A faster exchange does not necessarily improve liquidity. On the one hand, speed enables a high-frequency market maker (HFM) to update quotes faster on incoming news. This reduces payoff risk and thus lowers the competitive bid-ask spread. On the other hand, HFM price quotes are more likely to meet speculative high-frequency bandits, and thus are less likely to meet liquidity traders. This raises the spread. The net effect of exchange speed depends on a security's news-to-liquidity-trader ratio.

This publication has 0 references indexed in Scilit: