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

Andriy Shkilko, Konstantin SokolovFinance市场微观结构UTD24

Journal of Finance2020-07-27Social Sciences and Humanities Research Council; Wilfrid Laurier UniversityDOI

Citations161

Influential7

References80

ABSTRACT Modern markets are characterized by speed differentials, with some traders being fractions of a second faster than others. Theoretical models suggest that such differentials may have both positive and negative effects on liquidity and gains from trade. We examine these effects by studying a series of exogenous weather episodes that temporarily remove the speed advantages of the fastest traders by disrupting their microwave networks. The disruptions are associated with lower adverse selection and lower trading costs. In additional analysis, we show that the long‐term removal of speed differentials results in similar effects and also increases gains from trade.

Market liquidityHigh-frequency tradingCloud computingMonetary economicsMicrowaveTerm (time)Trading strategySelection (genetic algorithm)EconomicsBusinessEconometricsIndustrial organization