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The market quality implications of speed in cross-platform trading: evidence from Frankfurt-London microwave

Rzayev, Khaladdin, Ibikunle, Gbenga and Steffen, Tom (2023) The market quality implications of speed in cross-platform trading: evidence from Frankfurt-London microwave. Journal of Financial Markets, 66. ISSN 1386-4181

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Identification Number: 10.1016/j.finmar.2023.100853

Abstract

Exploiting information transmission latency between stock exchanges in Frankfurt and London, and speed-inducing technological upgrades, we show that when cross-market latency arbitrage opportunities are linked to the arrival of information, high-frequency traders' (HFTs’) activities impair liquidity and enhance price discovery by facilitating the incorporation of public information into prices. Conversely, when cross-market latency arbitrage opportunities are driven by liquidity shocks, HFTs improve liquidity and reduce trading costs, thus incentivizing information acquisition and trading with private information. These findings underscore the complex nature of the association between trading speed and market quality and reconcile mixed evidence in the extant literature.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-f...
Additional Information: © 2023 The Author(s)
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited: 15 Aug 2023 16:39
Last Modified: 15 Apr 2024 20:27
URI: http://eprints.lse.ac.uk/id/eprint/119989

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