Order-Flow Segmentation, Liquidity, and Price Discovery: The Role of Latency Delays

Brolley, Michael; Cimon, David A.

doi:10.1017/s002210901900067x

Cited by 27 publications

(9 citation statements)

References 50 publications

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“…The limit order book model by Baldauf and Mollner (2020) incorporates the random communication latency within the exchange system. Brolley and Cimon (2020) extend a model from Baldauf and Mollner (2020) by assuming that the market makers were endogenously affected by latency delay. Biais et al (2015) predict that speed arms race pushes venues to extensively invest in speed technology innovation,…”

Section: Speed Race (Low Latency)mentioning

confidence: 99%

Order Routing Decisions for a Fragmented Market: A Review

Mishra

Zhao

2021

JRFM

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This paper reviews the up-to-date theoretical, empirical, and experimental literature related to the trading venue choice in the context of the fragmented equity markets. We provide a brief background on the history of trading fragmentation in the equity market and its determinants. We discuss the direct and indirect impacts of the market fragmentation on market quality in various dimensions, including liquidity, volatility, and price efficiency. Next, we identify possible determinants and channels from theoretical and empirical studies that could explain order routing decisions and present the possible directions for future research. Finally, we discuss the major regulatory reforms in the U.S. equity market on routing venue decisions. This topic is relevant in current times when phenomena such as “GameStop Frenzy” have drawn significant attention to commission-free trading venues.

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Section: Speed Race (Low Latency)mentioning

confidence: 99%

Order Routing Decisions for a Fragmented Market: A Review

Mishra

Zhao

2021

JRFM

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“…For example, the TSX Alpha speed bump was introduced alongside a fee structure change. Third, exchanges adopt speed bumps to obtain a competitive advantage (Brolley and Cimon, 2018): they are consequently designed to maximize exchange profits rather than eliminate the high-frequency arms' race. In light of these challenges, we design a laboratory experiment to test the impact of speed bumps on latency investments.…”

Section: Table 1: Speed Bump Implementations and Existing Proposalsmentioning

confidence: 99%

Do speed bumps curb low-latency trading? Evidence from a laboratory market

Khapko¹,

Zoican²

2019

Preprint

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Exchanges implement intentional trade delays to limit the harmful impact of low-latency trading. Do such "speed bumps" curb investment in fast trading technology? Data is scarce since trading technologies are proprietary. We build an experimental trading platform where participants face speed bumps and can invest in fast trading technology. We find that asymmetric speed bumps, on average, reduce investment in speed by only 20%. Increasing the magnitude of the speed bump by one standard deviation further reduces low-latency investment by 8.33%. Finally, introducing a symmetric speed bump leads to the same investment level as no speed bump at all.

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“…Our model shares the same interests as the studies on the impact of slow market structures, such as frequent batch auctions (Budish et al, 2015;Haas and Zoican, 2016) and speed bumps (Baldauf and Mollner, 2017;Brolley and Cimon, 2017;Aldrich and Friedman, 2018), on HFTs' behavior and adverse selection for market makers. However, they do not consider a continuous optimal speed decision by HFTs with a delay-sensitive endogenous cost.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Finally, as in Haas and Zoican (2016) and Brolley and Cimon (2017), assume that trading information, including traders' identity, becomes public immediately after an order is executed, i.e., the market is perfectly transparent.…”

Section: Tradersmentioning

confidence: 99%

Strategic Speed Choice by High-Frequency Traders Under Speed Bumps

Aoyagi

2018

SSRN Journal

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We study how high-frequency traders (HFTs) strategically decide their speed level in a market with a random speed bump. If HFTs recognize the market impact of their speed decision, they perceive a wider bid-ask spread as an endogenous upward-sloping cost of being faster. We find that the speed elasticity of the bid-ask spread (slope of the endogenous cost function) negatively depends on the expected length of a speed bump since a longer delay makes market makers insensitive to HFTs' speed increment. Hence, speed bumps promote the investment of HFTs in high-speed technology by reducing the marginal cost of getting faster, undermining their intended purpose of protecting market makers. Depending on the expected length of a bump, an arms race among HFTs exhibits both complementarity and substitution. These findings explain the ambiguous empirical results regarding speed bumps and adverse selection for market makers.

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Order-Flow Segmentation, Liquidity, and Price Discovery: The Role of Latency Delays

Cited by 27 publications

References 50 publications

Order Routing Decisions for a Fragmented Market: A Review

Order Routing Decisions for a Fragmented Market: A Review

Do speed bumps curb low-latency trading? Evidence from a laboratory market

Strategic Speed Choice by High-Frequency Traders Under Speed Bumps

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