Review of Financial Studies Vol. 30 No. 4 2017
Need for Speed? Exchange Latency and Liquidity
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.
- Volume
- 30
- Issue
- 4
- Pages
- 1188-1228
- Sources
- bibtex:phds-export.bib