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Risk and Return in High-Frequency Trading

Author

Listed:
  • Baron, Matthew
  • Brogaard, Jonathan
  • Hagströmer, Björn
  • Kirilenko, Andrei

Abstract

We study performance and competition among firms engaging in high-frequency trading (HFT). We construct measures of latency and find that differences in relative latency account for large differences in HFT firms’ trading performance. HFT firms that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies, including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

Suggested Citation

  • Baron, Matthew & Brogaard, Jonathan & Hagströmer, Björn & Kirilenko, Andrei, 2019. "Risk and Return in High-Frequency Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(3), pages 993-1024, June.
  • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:03:p:993-1024_00
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    Cited by:

    1. repec:eee:finmar:v:43:y:2019:i:c:p:1-30 is not listed on IDEAS
    2. Michael Brolley & Marius Zoican, 2019. "Liquid Speed: On-Demand Fast Trading at Distributed Exchanges," Papers 1907.10720, arXiv.org.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G19 - Financial Economics - - General Financial Markets - - - Other

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