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Liquid speed: A micro-burst fee for low-latency exchanges

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  • Brolley, Michael
  • Zoican, Marius

Abstract

A micro-burst fee on liquidity-taking orders that surges during high-frequency races reduces costs associated with latency arbitrage. Moreover, micro-burst fees provide higher revenue for exchanges versus co-location subscriptions. Unlike co-location fees, micro-burst fees scale with trading activity and allow exchanges to extract higher revenues from HFTs. To ensure long-run adoption incentives for exchanges, a regulator should impose a cap on micro-burst fees; for example, a calibration suggests that liquidity improves with a micro-burst fee as low as 7.8 bps, while a Reg NMS cap on fees of 30 bps per share would improve liquidity by 75%.

Suggested Citation

  • Brolley, Michael & Zoican, Marius, 2023. "Liquid speed: A micro-burst fee for low-latency exchanges," Journal of Financial Markets, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:finmar:v:64:y:2023:i:c:s138641812200074x
    DOI: 10.1016/j.finmar.2022.100785
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    References listed on IDEAS

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    More about this item

    Keywords

    High-frequency trading; Latency arbitrage; Dynamic pricing; FinTech;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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