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Need for Speed? Exchange Latency and Liquidity

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
30
Number
4
Publisher
Oxford University Press
Pages
1188-1228
Publication identifier
10.1093/rfs/hhx006
Metadata
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Author(s)
Menkveld, Albert

Zoican, Marius Andrei
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

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