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Price formation, market quality and the effects of reduced latency in the very short run

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  • Bank, Matthias
  • Baumann, Ralf H.

Abstract

Applying an innovative event study methodology to ultra short return horizons, this paper resolves market adjustment in the aftermath of corporate news events with unprecedented precision. It uncovers the ramifications of the reduction in latency of the German stock market on April 23rd 2007 and shows that it has had positive consequences for market quality. Analyzing second by second time windows the paper demonstrates that price determination, market efficiency as well as quoted spreads and order flow have significantly improved not only in broad average terms, but in particular during informative events.

Suggested Citation

  • Bank, Matthias & Baumann, Ralf H., 2016. "Price formation, market quality and the effects of reduced latency in the very short run," Research in International Business and Finance, Elsevier, vol. 37(C), pages 629-645.
    • Handle: RePEc:eee:riibaf:v:37:y:2016:i:c:p:629-645
    DOI: 10.1016/j.ribaf.2016.01.010
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    Keywords

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    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

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