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

By Andriy Shkilko, Konstantin Sokolov. Journal of Finance, 2020

119 citations recorded by the source corpus.

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. Is such a marketplace optimal? 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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/0eafa8509404c78cecc59ecbe4f7d52a0ed74d11

Citations in the corpus

• Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality (2021, unknown): “Kirilenko, et al, 2017; Shkilko and Sokolov, 2020). In particular, van Kervel and Menkveld (2019) find evidence that HFTs engage in predatory trading around large institutional orders, whereas”
• Risk and Return in High-Frequency Trading (2018, unknown): “While HFTs benefit from the use of microwave transmission technologies (Shkilko and Sokolov, 2016) and colocation services (Brogaard, Hagströmer, Nordén, and Riordan, 2015), it is 1 For example, Bongaerts and van Achter (2015), Jovanovic and Menkveld (2015), Aït-Sahalia and Saglam (2014), and…”