Does public latency influence market quality? An analysis of pre-trade transparency at the Taiwan futures exchange

Abstract In order to smooth out the trading process and to offer customers real-time information, the ‘electronic trading system’ (ETS) on the Taiwan Futures Exchange (TAIFEX) has increased the frequency of market information updates and shortened the quote display time interval in the electronic open book on three separate occasions from the initial five-second period, to three seconds on 6 March 2006, one second on 28 January 2008, and a quarter of a second on 31 August 2009. According to the analyses of the around event without contamination by the sub-prime financial crisis and structure changes, our findings indicate a persistent decrease both in spread and transient volatility, and a persistent increase in depth in the period following the continuous reduction in the public latency. These results suggest that an increase pre-trade transparency by continuously updating order book information dissemination technology systems in millisecond trading environment can improve market quality.