Need for Speed? Exchange Latency and Liquidity

Menkveld, Albert; Zoican, Marius Andrei

Menkveld, Albert; Zoican, Marius Andrei (2017), Need for Speed? Exchange Latency and Liquidity, The Review of Financial Studies, 30, 4, p. 1188-1228. 10.1093/rfs/hhx006

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Type

Article accepté pour publication ou publié

Date

2017

Journal name

The Review of Financial Studies

Volume

Number

Publisher

Oxford University Press

Pages

1188-1228

Abstract (EN)

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.

Subjects / Keywords

exchange latency, high frequency trading, microstructure

JEL

G14 - Information and Market Efficiency; Event Studies; Insider Trading
G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading Volume; Bond Interest Rates