Fast and Furious: The Market Quality Implications of Speed in Cross-Border Trading

Using a measure of transmission latency between exchanges in Frankfurt and London and exploiting speed-inducing technological upgrades, we investigate the impact of international transmission latency on liquidity and volatility. We find that a decrease in transmission latency increases liquidity and volatility. In line with existing theoretical models, we show that the amplification of liquidity and volatility is associated with variations in adverse selection risk and aggressive trading. We then investigate the net economic effect of high speed and find that the liquidity-enhancing benefit of increased trading speed in financial markets outweighs its volatility-inducing effect.