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Latency in Fragmented Markets

Author

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  • Tomy Lee

    (Central European University)

Abstract

I examine the impact of cross-venue latency on market quality using a model of informed trader competition in a fragmented market. As cross-venue latency decreases, liquidity and price discovery improve while the expected profits of informed traders decline. Moreover, a fall in the latency of one venue can harm liquidity at the other venue. An extension predicts that, as the informed traders consolidate or outsource trading, benefits of shorter cross-venue latency are attenuated and its harmful effects intensify. My model generates testable predictions about the effects of changes in cross-venue latency on market quality. (Copyright: Elsevier)

Suggested Citation

  • Tomy Lee, 2019. "Latency in Fragmented Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 128-153, July.
  • Handle: RePEc:red:issued:18-287
    DOI: 10.1016/j.red.2019.04.010
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    File URL: http://dx.doi.org/10.1016/j.red.2019.04.010
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    Cited by:

    1. Benjamin Lester & Pierre-Olivier Weill & Ariel Zetlin-Jones, 2019. "RED Special Issue on Fragmented Financial Markets: An Introduction," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 1-3, July.

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    More about this item

    Keywords

    Latency; Market fragmentation; Liquidity; Price discovery;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G1 - Financial Economics - - General Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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