Fast Traders Make a Quick Buck: The Role of Speed in Liquidity Provision

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Abstract
We study the consequences of information arrival for market outcomes when both high-frequency and slower traders provide liquidity. We present a model that predicts faster traders achieve a relative increase in profits obtained from liquidity provision following a news event through (i) avoiding adverse selection by canceling mispriced quotes, and (ii) winning the race to post updated quotes. We find strong support for these model predictions using data from the Toronto Stock Exchange. The identification strategy is based on an unanticipated news event in which the Twitter feed of the Associated Press falsely reported a terrorist attack.