Speed of Trade and Liquidity
42 Pages Posted: 17 Aug 2011 Last revised: 2 Jan 2012
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: Suggested Citation