The impact of latency sensitive trading on high frequency arbitrage opportunities

Connectivity costs and price efficiency: An event study

“…The advent of decreased connectivity costs, traders opt for higher connection speed subscriptions resulting in a more efficient market, as measured by a reduction in the frequency, duration, and profitability of arbitrages. Consistent with Budish et al (2015) and Frino et al (2017), the frequency of arbitrage opportunities and volatility are positively correlated.…”

“…The results, however, do not show a reduction in the profitability of arbitrages following the first event. Reported findings differ from those of Frino et al (2017), which might be explained by the fact that they were analyzing an event affecting high frequency trading only, while this paper looks at an exchange wide improvement in the speed of access. Turning to the second event, the analysis of the impact of a reduction in the price for direct market access for a subset of traders supports the predictions of Biais et al (2015).…”

“…Frino et al (2017) and Chaboud et al (2014) investigate the relationship between HFT and arbitrage and find mixed evidence that HFT activity impacts markets. Frino et al (2017) use the number of connections to the ASX colocation facility as a proxy for HFT competition and focus on the impact of its increase on arbitrage opportunities vis‐a‐vis liquidity effects.…”

The role of algorithmic trading in stock liquidity and commonality in electronic limit order markets

“…Others emphasize the detrimental effects of AT on market quality, such as the increase in mispricing due to the increase in execution risk (Frino et al, 2016). Algorithmic traders, through their ability to process information rapidly, can also exploit other traders such as those who trade for liquidity reasons (e.g., Cartea and Penalva, 2012).…”

“…In this study, we take an encompassing approach to understand the impact of AT on an electronic limit order market by examining its effects on three dimensions, namely, (1) bid-ask spreads and market depths, (2) commonality in liquidity, and (3) market liquidity after large market declines.A growing body of literature seeks to understand the impact of AT on markets but these studies provide conflicting results. Some studies argue that AT can benefit market participants and reduce transaction costs by increasing competition among liquidity providers and eliminating information friction (e.g., Hendershott et al, 2011;Riordan and Storkenmaier, 2012).Others emphasize the detrimental effects of AT on market quality, such as the increase in mispricing due to the increase in execution risk (Frino et al, 2016). Algorithmic traders, through their ability to process information rapidly, can also exploit other traders such as those who trade for liquidity reasons (e.g., Cartea and Penalva, 2012).…”