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Menkveld, A. and Zoican, M. (2017). Need for speed? exchange latency and liquidity. Review of Financial Studies, 30(4):1188-1228.


  • Journal
    Review of Financial Studies

A faster exchange does not necessarily improve liquidity. On the one hand, speed enables a high-frequency market maker (HFM) to update quotes faster on incoming news. This reduces payoff risk and thus lowers the competitive bid-ask spread. On the other hand, HFM price quotes are more likely to meet speculative high-frequency bandits, and thus are less likely to meet liquidity traders. This raises the spread. The net effect of exchange speed depends on a security's news-to-liquidity-trader ratio.