Open AccessNeed for Speed? Exchange Latency and Liquidity
Author(s) -
Albert J. Menkveld,
Marius Zoican
Publication year - 2017
Publication title -
review of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 12.8
H-Index - 190
eISSN - 1465-7368
pISSN - 0893-9454
DOI - 10.1093/rfs/hhx006
Subject(s) - market liquidity , upgrade , market maker , monetary economics , adverse selection , business , latency (audio) , accounting liquidity , liquidity crisis , liquidity risk , economics , computer science , finance , telecommunications , paleontology , stock market , operating system , biology , horse
International audienceA 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
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