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The Fast and the Furious: Exchange Latency and Ever-fast Trading

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Abstract

This paper examines how technological innovations drive fast trading investment for both speculators and exchanges and their impact on market. The negative externality of the speed acquisition from fast speculators can result in excessive investment, which is intensified as speculators’ speed technology advances. As exchange’s speed technology advances, faster exchange makes faster speculators more concentrated; that is, higher exchange speed shrinks market fraction of fast speculators but stimulates their optimal trading speed. As the result, market liquidity is improved but price discovery is reduced. Policy makers aiming to balance price discovery and deadweight loss from costly speed investment may lead to a mismatch between the desired exchange speed for policy makers and the optimal speed supplied by exchange, echoing the concerns of market regulations about market failure on speed arms race.

Suggested Citation

  • Xue-Zhong He & Junqing Kang & Xuan Zhou, 2020. "The Fast and the Furious: Exchange Latency and Ever-fast Trading," Research Paper Series 419, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:419
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    Cited by:

    1. Bao, Te, 2022. "Comments on “the role of information in a continuous double auction: An experiment and learning model” by Mikhail Anufriev, Jasmina Arifovic, John Ledyard and Valentyn Panchenko," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    2. Anufriev, Mikhail & Arifovic, Jasmina & Ledyard, John & Panchenko, Valentyn, 2022. "The role of information in a continuous double auction: An experiment and learning model," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).

    More about this item

    Keywords

    Exchange latency; high-frequency trading; speed hierarchy;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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