Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2014-07-28
Number: 14-097/IV
Author-Name: Albert J. Menkveld
Author-Workplace-Name: VU University Amsterdam
Author-Name: Marius A. Zoican
Author-Workplace-Name: VU University Amsterdam
Title: Need for Speed? Exchange Latency and Liquidity
Abstract: Speeding up the exchange does not necessarily improve liquidity. The price quotes of high-frequency market makers are more likely to meet speculative high-frequency "bandits", thus less likely to meet liquidity traders. The bid-ask spread is raised in response. The recursive dynamic model reveals that there is an additional spread-widening effect as market makers earn higher rents due to economies of scope from quote monitoring. Analysis of a NASDAQ-OMX speed upgrade provides supportive evidence.
Classification-JEL: G11, G12, G14
Keywords: market microstructure, trading speed, information asymmetry, high-frequency trading
File-Url: https://papers.tinbergen.nl/14097.pdf
File-Format: application/pdf
File-Size: 610470 bytes
Handle: RePEc:tin:wpaper:20140097