Low-Latency Trading – Paper for quant development and quant analytics
Low-Latency Trading – Paper
One important conclusion of this paper is that:
In the current environment, increased low-latency activity improves traditional market quality measures such as short-term volatility, spreads, and displayed depth in the limit order book.
This paper studies market activity in the “millisecond environment,” where computer algorithms respond to each other almost instantaneously. Using order-level NASDAQ data, we find that the millisecond environment consists of activity by some traders who respond to market events (like changes in the limit order book) within roughly 2-3 ms, and others who seem to cycle in wall-clock time. We define low-latency activity as strategies that respond to market events in the millisecond environment, the hallmark of proprietary trading by a new breed of high-frequency trading firms. We construct a measure of low-latency activity by identifying “strategic runs,” which are linked submissions, cancellations, and executions that are likely to be parts of a dynamic strategy. We use this measure to study the impact that low-latency activity has on market quality both during normal market conditions and during a period of declining prices and heightened economic uncertainty. Our conclusion is that in the current environment, increased low-latency activity improves traditional market quality measures such as short-term volatility, spreads, and displayed depth in the limit order book.
Number of Pages in PDF File: 59
Working Paper Series
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