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The speed premium: high-frequency trading and the cost of capital

Author

Listed:
  • Matteo Aquilina
  • Gbenga Ibikunle
  • Khaladdin Rzayev
  • Xuesi Wang

Abstract

When trading in financial markets reaches light speed, does the real economy slow down? Using co-location and latency improvement upgrades at NASDAQ as natural experiments, we find that, on average, high frequency trading (HFT) leads to higher cost of capital. However, the impact is not uniform. HFT raises the cost of capital for low-beta stocks by amplifying their systematic risk, as HFT's correlated trading strategies make these stocks more responsive to market-wide information. For the most liquid stocks, HFT reduces the cost of capital by lowering the liquidity premium required by investors. A complementary test using data from the unfragmented Hong Kong market shows that these causal effects are not due to market fragmentation and persist across countries and market structures. Our results demonstrate that HFT's real economic effects are heterogeneous across stock characteristics, with important implications for financial market regulation and policy design.

Suggested Citation

  • Matteo Aquilina & Gbenga Ibikunle & Khaladdin Rzayev & Xuesi Wang, 2025. "The speed premium: high-frequency trading and the cost of capital," BIS Working Papers 1290, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1290
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    References listed on IDEAS

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    2. Benos, Evangelos & Brugler, James & Hjalmarsson, Erik & Zikes, Filip, 2017. "Interactions among High-Frequency Traders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(4), pages 1375-1402, August.
    3. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
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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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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