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Latency Arbitrage When Markets Become Faster

Author

Listed:
  • Hollifield, Burton

    (Tepper School of Business Carnegie Mellon University)

  • Sandås, Patrik

    (McIntire School of Commerce University of Virginia)

  • Todd, Andrew

    (University of Virginia)

Abstract

We measure the incidence of latency arbitrage for cross-listed stocks around the time of an exogenous shock that made the markets faster. Our sample is from NASDAQ Nordic and consists of Nordic blue chip firms listed and traded in multiple markets. We document a sharp decline in the incidence of cross-market arbitrage opportunities across the Nordic markets for cross-listed stocks from 2009 to 2010 and later. Over the five year sample period 77% of the observed cross-market arbitrage opportunities occurred in 2009 and 13% in 2010 and the remaining 10% spread over the last three years. The inside spread declines by, on average, 14.5 basis points or 53% from 2009 to 2013. Our results point to significant improvements in market efficiency and market quality as a result of the switch to a faster trading system.

Suggested Citation

  • Hollifield, Burton & Sandås, Patrik & Todd, Andrew, 2017. "Latency Arbitrage When Markets Become Faster," Working Paper Series 338, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0338
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    Cited by:

    1. Yang, Haijun & Ge, Hengshun & Luo, Ying, 2020. "The optimal bid-ask price strategies of high-frequency trading and the effect on market liquidity," Research in International Business and Finance, Elsevier, vol. 53(C).

    More about this item

    Keywords

    Cross-market Arbitrage; Information Eciency; High Frequency Trading;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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