TY - JOUR
T1 - Fast traders make a quick buck
T2 - The role of speed in liquidity provision
AU - Baldauf, Markus
AU - Mollner, Joshua
N1 - Funding Information:
We thank Timothy Bresnahan, Darrell Duffie, Liran Einav, Matthew Gentzkow, Joseph Grundfest, Laurie Hodrick, Jonathan Levin, Paul Milgrom, Monika Piazzesi, Peter Reiss, Ioanid Roşu, Bernhard Silli, and seminar participants at Stanford for useful comments. We also thank various industry experts for sharing their insights, as well as NASDAQ OMX and TMX Datalinx for providing the data and answering our questions. This work used the Extreme Science and Engineering Discovery Environment (XSEDE), which is supported by National Science Foundation grant number OCI-1053575 . We acknowledge financial support by the Kohlhagen Fellowship Fund and the Kapnick Fellowship Program through grants to the Stanford Institute for Economic Policy Research . Markus Baldauf acknowledges support by the Social Sciences and Humanities Research Council of Canada . Previous versions of this paper were entitled “The private value of speed: High-frequency trading and the supply of liquidity” and “Fast trading on fake news: The role of speed in liquidity provision.” First version: September 2012.
Publisher Copyright:
© 2021 Elsevier B.V.
PY - 2022/3
Y1 - 2022/3
N2 - In modern public equity markets, liquidity is provided by a heterogeneous set of traders with vastly different speeds. We study the consequences of information arrival in such a setting. We present a model that predicts faster traders achieve a relative increase in profits obtained from liquidity provision following information events through (i) avoiding adverse selection by canceling mispriced quotes, and (ii) winning the race to post updated quotes. We also find strong support for these model predictions using data from the Toronto Stock Exchange. The identification strategy is based on an unanticipated “fake news” event in which the Twitter feed of the Associated Press falsely reported a terrorist attack.
AB - In modern public equity markets, liquidity is provided by a heterogeneous set of traders with vastly different speeds. We study the consequences of information arrival in such a setting. We present a model that predicts faster traders achieve a relative increase in profits obtained from liquidity provision following information events through (i) avoiding adverse selection by canceling mispriced quotes, and (ii) winning the race to post updated quotes. We also find strong support for these model predictions using data from the Toronto Stock Exchange. The identification strategy is based on an unanticipated “fake news” event in which the Twitter feed of the Associated Press falsely reported a terrorist attack.
KW - High-frequency trading
KW - Liquidity provision
KW - Speed heterogeneity
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U2 - 10.1016/j.finmar.2021.100621
DO - 10.1016/j.finmar.2021.100621
M3 - Article
AN - SCOPUS:85102286693
VL - 58
JO - Journal of Financial Markets
JF - Journal of Financial Markets
SN - 1386-4181
M1 - 100621
ER -
