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.
Original language | English |
---|---|
Pages (from-to) | 1188-1228 |
Number of pages | 41 |
Journal | The Review of Financial Studies |
Volume | 30 |
Issue number | 4 |
DOIs | |
Publication status | Published - 2017 |