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Session Overview
FMG-2: Fast Trading
Thursday, 24/Aug/2017:
10:30am - 12:00pm

Session Chair: Marios Panayides, University of Pittsburgh
Location: O145

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Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs

Andriy Shkilko, Konstantin Sokolov

Wilfrid Laurier University

Discussant(s): Erik Theissen (University of Mannheim)

In modern markets, trading firms spend generously to gain a speed advantage over their rivals. The marketplace that results from this rivalry is characterized by speed differentials, whereby some traders are faster than others. How does such a marketplace affect liquidity? To answer this question, we study a series of exogenous weather-related episodes that temporarily remove speed advantages of the fastest traders by disrupting their microwave networks. During these episodes, adverse selection declines accompanied by improved liquidity and reduced volatility. Liquidity improvement is larger than the decline in adverse selection consistent with the emergence of latent liquidity and enhanced competition among liquidity suppliers. The results are confirmed in an event-study setting, whereby a new business model adopted by one of the technology providers reduces speed differentials among traders, resulting in liquidity improvements.

EFA2017-817-FMG-2-Shkilko-Every Cloud Has a Silver Lining.pdf

The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets

Haoming Chen1, Sean Foley2, Michael A. Goldstein3, Thomas Ruf1

1University of New South Wales; 2University of Sydney; 3Babson College

Discussant(s): Sabrina Buti (Université Paris-Dauphine)

We examine the introduction of a speed bump by an existing exchange, which provides certain participants with guaranteed speed advantages. A selective order processing delay for marketable orders on TSX Alpha allows low-latency liquidity providers to avoid adverse selection through their ability to react to activity on other venues. These changes increase profits for liquidity providers on TSX Alpha but negatively impact aggregate liquidity: market-wide costs for liquidity demanders increase, with liquidity suppliers’ profits reduced across remaining venues. Our findings have implications for the speed bump debate in the United States, speed differentials more generally, as well as the regulation of market linkages across fragmented trading venues.

EFA2017-986-FMG-2-Chen-The Value of a Millisecond.pdf

Dark Pool Reference Price Latency Arbitrage

Matteo Aquilina1, Sean Foley2, Peter O'Neill3, Thomas Ruf3

1Financial Conduct Authority; 2University of Sydney; 3University of New South Wales

Discussant(s): Charles Trzcinka (Indiana University)

Using proprietary order book data with participant-level message traffic and matching engine time stamps, we investigate the nature of stale reference pricing in dark pools. We document a sizeable proportion of stale trading which imposes large adverse selection on the passive side in dark pools. We are the first to document that HFTs almost never provide liquidity and instead frequently take liquidity in the dark, in particular in order to take advantage of stale quotes in the dark. Finally, we examine several market design interventions to mitigate stale trades, showing that only mechanisms to protect passive dark liquidity, such as random uncrossings, are effective.

EFA2017-1832-FMG-2-Aquilina-Dark Pool Reference Price Latency Arbitrage.pdf

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