Speed of Trade and Liquidity

42 Pages Posted: 17 Aug 2011 Last revised: 2 Jan 2012

See all articles by Jun Uno

Jun Uno

Waseda University

Mai Shibata

affiliation not provided to SSRN

Date Written: October 30, 2011


We investigate whether increasing the speed of order execution affects investor trading strategy and market liquidity. With the new trading platform Arrowhead, the Tokyo Stock Exchange has eliminated the three-second matching cycle, executes orders immediately, and instantaneously updates the limit order book, rendering computerized trading strategies more powerful. Since Arrowhead’s introduction, there have been an increase in execution frequency and a reduction in trade size, leading to declines in effective spread and increases in adverse selection costs. Among the trade intensity variables we examine, persistency of runs affects adverse selection cost more than share imbalance. High-speed quote revisions contribute to market depth.

Keywords: Liquidity provision, high-frequency trading, persistency of runs, order imbalance, bid–ask spread

JEL Classification: G10, G12, G14

Suggested Citation

Uno, Jun and Shibata, Mai, Speed of Trade and Liquidity (October 30, 2011). 24th Australasian Finance and Banking Conference 2011 Paper, Available at SSRN: https://ssrn.com/abstract=1910200 or http://dx.doi.org/10.2139/ssrn.1910200

Jun Uno (Contact Author)

Waseda University ( email )

1-6-1 Nishi-Waseda
Tokyo, 1698050

Mai Shibata

affiliation not provided to SSRN ( email )

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