Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/230457
Authors: 
Aoyagi, Jun
Year of Publication: 
2019
Series/Report no.: 
ISER Discussion Paper No. 1050
Abstract: 
We study how high-frequency traders (HFTs) strategically decide their speed level in a market with a random speed bump. If HFTs recognize the market impact of their speed decision, they perceive a wider bid-ask spread as an endogenous upward-sloping cost of being faster. We find that the speed elasticity of the bid-ask spread (slope of the endogenous cost function) negatively depends on the expected length of a speed bump since a longer delay makes market makers insensitive to HFTs' speed increment. Hence, speed bumps promote the investment of HFTs in high-speed technology by reducing the marginal cost of getting faster, undermining their intended purpose of protecting market makers. Depending on the expected length of a bump, an arms race among HFTs exhibits both complementarity and substitution. These findings explain the ambiguous empirical results regarding speed bumps and adverse selection for market makers.
Subjects: 
High-frequency trading
market structure
speed bumps
adverse selection
strategic speed decision
JEL: 
D40
D47
G10
G18
G20
Document Type: 
Working Paper

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