Need for speed? Exchange latency and liquidity

Albert J. Menkveld*, Marius A. Zoican

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review


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.

Original languageEnglish
Pages (from-to)1188-1228
Number of pages41
JournalThe Review of Financial Studies
Issue number4
Publication statusPublished - 2017


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