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Trading Fast and Slow: Colocation and Liquidity
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
2015 (English)In: The Review of financial studies, ISSN 0893-9454, E-ISSN 1465-7368, Vol. 28, no 12, 3407-3443 p.Article in journal (Refereed) Published
Abstract [en]

We exploit an optional colocation upgrade at NASDAQ OMX Stockholm to assess how speed affects market liquidity. Liquidity improves for the overall market and even for noncolocated trading entities. We find that the upgrade is pursued mainly by participants who engage in market making. Those that upgrade use their enhanced speed to reduce their exposure to adverse selection and to relax their inventory constraints. In particular, the upgraded trading entities remain competitive at the best bid and offer even when their inventories are in their top decile. Our results suggest that increasing the speed of market making participants benefits market liquidity.

Place, publisher, year, edition, pages
2015. Vol. 28, no 12, 3407-3443 p.
National Category
Business Administration
Research subject
Business Administration; Economics
Identifiers
URN: urn:nbn:se:su:diva-123297DOI: 10.1093/rfs/hhv045ISI: 000366449900006OAI: oai:DiVA.org:su-123297DiVA: diva2:873136
Funder
The Jan Wallander and Tom Hedelius Foundation, P2013-0209:1The Jan Wallander and Tom Hedelius Foundation, F2014-0068:1
Available from: 2015-11-23 Created: 2015-11-23 Last updated: 2016-01-18Bibliographically approved

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Hagströmer, BjörnNordén, Lars
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ReferencesLink to record
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