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Risk and Return in High-Frequency Trading
Cornell University - Samuel Curtis Johnson Graduate School of Management.
Foster School of Business, University of Washington.
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance. Stockholm Business School.ORCID iD: 0000-0003-0055-5121
Imperial College London - Centre for Global Finance and Technology.
(English)In: Journal of financial and quantitative analysis, ISSN 0022-1090, E-ISSN 1756-6916Article in journal (Refereed) In press
Abstract [en]

We study performance and competition among high-frequency traders (HFTs). We construct measures of latency and find that differences in relative latency account for large differences in HFTs’ trading performance. HFTs that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

Keyword [en]
high-frequency trading, low latency, market microstructure
National Category
Economics Business Administration
Identifiers
URN: urn:nbn:se:su:diva-154858OAI: oai:DiVA.org:su-154858DiVA, id: diva2:1195387
Funder
The Jan Wallander and Tom Hedelius Foundation, P15-0089
Available from: 2018-04-05 Created: 2018-04-05 Last updated: 2018-04-05

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