TY - JOUR
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
N1 - Funding Information:
For helpful comments, we are grateful to an anonymous referee, an anonymous advisory editor, the Editor (Gideon Saar), Bruno Biais, Maria Boutchkova, Marcos Carreira, Jo Danbolt, Jon Danielsson, Sean Foley, Angelica Gonzalez, Alexandre Laumonier, Ian Marsh, Han Ozsoylev, Talis Putnins, Mathieu Rosenbaum, Satchit Sagade, Avanidhar Subrahmanyam, Jean-Pierre Zigrand, as well as seminar/conference participants at the 2020 Annual Meeting of the American Finance Association, the 27th Conference on the Theories and Practices of Securities and Financial Markets, the Regulation and Operation of Modern Financial Markets Conference, The Future of Computer Trading in Financial Markets: has it happened? Conference, the 3rd European Capital Markets Workshop, Dublin City University, Koç University, London School of Economics, the University of Edinburgh, and Victoria University of Wellington. Khaladdin gratefully acknowledges the support of the Trans-Atlantic Platform by the Economic and Social Research Council (ESRC) [grant number ES/R004021/1].
Funding Information:
☆ For helpful comments, we are grateful to an anonymous referee, an anonymous advisory editor, the Editor (Gideon Saar), Bruno Biais, Maria Boutchkova, Marcos Carreira, Jo Danbolt, Jon Danielsson, Sean Foley, Angelica Gonzalez, Alexandre Laumonier, Ian Marsh, Han Ozsoylev, Talis Putnins, Mathieu Rosenbaum, Satchit Sagade, Avanidhar Subrahmanyam, Jean-Pierre Zigrand, as well as seminar/conference participants at the 2020 Annual Meeting of the American Finance Association, the 27th Conference on the Theories and Practices of Securities and Financial Markets, the Regulation and Operation of Modern Financial Markets Conference, The Future of Computer Trading in Financial Markets: has it happened? Conference, the 3rd European Capital Markets Workshop, Dublin City University, Koç University, London School of Economics, the University of Edinburgh, and Victoria University of Wellington. Khaladdin gratefully acknowledges the support of the Trans-Atlantic Platform by the Economic and Social Research Council (ESRC) [grant number ES/R004021/1].
Publisher Copyright:
© 2023 The Authors
PY - 2023/11
Y1 - 2023/11
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 - price discovery
U2 - 10.1016/j.finmar.2023.100853
DO - 10.1016/j.finmar.2023.100853
M3 - Article
SN - 1386-4181
VL - 66
SP - 1
EP - 24
JO - Journal of Financial Markets
JF - Journal of Financial Markets
M1 - 100853
ER -