Abstract
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.
| Original language | English |
|---|---|
| Number of pages | 63 |
| Publication status | Unpublished - Oct 2020 |
Keywords / Materials (for Non-textual outputs)
- transmission latency
- microwave connection
- high-frequency trading
- liquidity
- volatility