Market efficiency in real time: Evidence from low latency activity around earnings announcements

Abstract The literature has used small samples to show that fast trading or low latency trading (LLT) improves efficiency at extremely high frequencies. However, it is not clear whether LLT driven high frequency improvements in efficiency can impact corporate decision making and investor risk sharing or hedging, which are low frequency processes. This paper uses a comprehensive cross-sectional and time-series sample to provide evidence that LLT enhances efficiency around earnings announcements. Low latency traders trade aggressively at the time of the earnings announcements, such that the information in earnings surprises is quickly incorporated into prices and the post-announcement drift is reduced.