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.
Type
Publication
The Review of Financial Studies, 2017, 30(4), 1188-1228.
Marius Zoican
Associate Professor of Finance
I study the impact of (new) technology on securities exchanges and asset management, as well as how to leverage technological innovations to build a better market.