# 14-097/IV (2014-07-28)

Author(s)
Albert J. Menkveld, VU University Amsterdam; Marius A. Zoican, VU University Amsterdam
Keywords:
market microstructure, trading speed, information asymmetry, high-frequency trading
JEL codes:
G11, G12, G14

Speeding up the exchange does not necessarily improve liquidity. The price quotes of high-frequency market makers are more likely to meet speculative high-frequency "bandits", thus less likely to meet liquidity traders. The bid-ask spread is raised in response. The recursive dynamic model reveals that there is an additional spread-widening effect as market makers earn higher rents due to economies of scope from quote monitoring. Analysis of a NASDAQ-OMX speed upgrade provides supportive evidence.