TY - UNPB
T1 - The market quality implications of speed in cross-platform trading
T2 - Evidence from Frankfurt-London microwave networks
AU - Rzayev, Khaladdin
AU - Ibikunle, Gbenga
AU - Steffen, Tom
PY - 2020/10
Y1 - 2020/10
N2 - Exploiting information transmission latency between exchanges in Frankfurt and London, and speed-inducing technological upgrades, we show that when cross-market latency arbitrage opportunities are linked to the arrival of information, high-frequency trading (HFT) activity impairs liquidity and enhances price discovery by facilitating the incorporation of public information into prices. Conversely, when cross-market latency arbitrage opportunities are driven by liquidity shocks, HFT improves liquidity and reduces trading costs, thus incentivizing information acquisition and trading with private information. These findings underscore the complex nature of the association between trading speed and market quality and reconcile mixed evidence in the extant literature.
AB - Exploiting information transmission latency between exchanges in Frankfurt and London, and speed-inducing technological upgrades, we show that when cross-market latency arbitrage opportunities are linked to the arrival of information, high-frequency trading (HFT) activity impairs liquidity and enhances price discovery by facilitating the incorporation of public information into prices. Conversely, when cross-market latency arbitrage opportunities are driven by liquidity shocks, HFT improves liquidity and reduces trading costs, thus incentivizing information acquisition and trading with private information. These findings underscore the complex nature of the association between trading speed and market quality and reconcile mixed evidence in the extant literature.
KW - transmission latency
KW - microwave connection
KW - high-frequency trading
KW - liquidity
KW - volatility
M3 - Working paper
BT - The market quality implications of speed in cross-platform trading
ER -