Fast traders make a quick buck: The role of speed in liquidity provision

Markus Baldauf; Joshua Mollner

doi:10.1016/j.finmar.2021.100621

Fast traders make a quick buck: The role of speed in liquidity provision

Markus Baldauf^*, Joshua Mollner

^*Corresponding author for this work

Managerial Economics, Decision Sciences and Operations

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

3 Scopus citations

Abstract

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.

Original language	English (US)
Article number	100621
Journal	Journal of Financial Markets
Volume	58
DOIs	https://doi.org/10.1016/j.finmar.2021.100621
State	Published - Mar 2022

Funding

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.

Keywords

High-frequency trading
Liquidity provision
Speed heterogeneity

ASJC Scopus subject areas

Finance
Economics and Econometrics

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.finmar.2021.100621

Cite this

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abstract = "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.",

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Fast traders make a quick buck: The role of speed in liquidity provision

Abstract

Funding

Keywords

ASJC Scopus subject areas

UN SDGs

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