Latency in fragmented markets

Tomy Lee

doi:10.1016/j.red.2019.04.010

Latency in fragmented markets

Tomy Lee^*

^*Corresponding author for this work

Department of Economics

Research output: Contribution to journal › Article › peer-review

Abstract (may include machine translation)

I examine the impact of cross-venue latency on market quality using a model of informed trader competition in a fragmented market. As cross-venue latency decreases, liquidity and price discovery improve while the expected profits of informed traders decline. Moreover, a fall in the latency of one venue can harm liquidity at the other venue. An extension predicts that, as the informed traders consolidate or outsource trading, benefits of shorter cross-venue latency are attenuated and its harmful effects intensify. My model generates testable predictions about the effects of changes in cross-venue latency on market quality.

Original language	English
Pages (from-to)	128-153
Number of pages	26
Journal	Review of Economic Dynamics
Volume	33
DOIs	https://doi.org/10.1016/j.red.2019.04.010
State	Published - Jul 2019

Keywords

Latency
Liquidity
Market fragmentation
Price discovery

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10.1016/j.red.2019.04.010

Cite this

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title = "Latency in fragmented markets",

abstract = "I examine the impact of cross-venue latency on market quality using a model of informed trader competition in a fragmented market. As cross-venue latency decreases, liquidity and price discovery improve while the expected profits of informed traders decline. Moreover, a fall in the latency of one venue can harm liquidity at the other venue. An extension predicts that, as the informed traders consolidate or outsource trading, benefits of shorter cross-venue latency are attenuated and its harmful effects intensify. My model generates testable predictions about the effects of changes in cross-venue latency on market quality.",

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AB - I examine the impact of cross-venue latency on market quality using a model of informed trader competition in a fragmented market. As cross-venue latency decreases, liquidity and price discovery improve while the expected profits of informed traders decline. Moreover, a fall in the latency of one venue can harm liquidity at the other venue. An extension predicts that, as the informed traders consolidate or outsource trading, benefits of shorter cross-venue latency are attenuated and its harmful effects intensify. My model generates testable predictions about the effects of changes in cross-venue latency on market quality.

KW - Latency

KW - Liquidity

KW - Market fragmentation

KW - Price discovery

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Latency in fragmented markets

Abstract (may include machine translation)

Keywords

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