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Need for Speed? Exchange Latency and Liquidity

Author

Listed:
  • Albert Menkveld

    (UvA - University of Amsterdam [Amsterdam])

  • Marius Andrei Zoican

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

A faster exchange does not necessarily improve liquidity. On the one hand, speed enables a high-frequency market maker (HFM) to update quotes faster on incoming news. This reduces payoff risk and thus lowers the competitive bid-ask spread. On the other hand, HFM price quotes are more likely to meet speculative high-frequency bandits, and thus are less likely to meet liquidity traders. This raises the spread. The net effect of exchange speed depends on a security's news-to-liquidity-trader ratio.

Suggested Citation

  • Albert Menkveld & Marius Andrei Zoican, 2017. "Need for Speed? Exchange Latency and Liquidity," Post-Print hal-01501352, HAL.
  • Handle: RePEc:hal:journl:hal-01501352
    DOI: 10.1093/rfs/hhx006
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01501352
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Microstructure; High frequency trading; Exchange latency; G11; G12; G14;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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