Abstract
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.
| Item Type: | Journal article |
|---|---|
| Faculties: | Munich School of Management > Institute for Financial Innovation and Technology |
| Subjects: | 300 Social sciences > 330 Economics |
| JEL Classification: | G14, G23, L1 |
| Language: | English |
| Item ID: | 107101 |
| Date Deposited: | 13. Sep 2023, 16:50 |
| Last Modified: | 13. Sep 2023, 16:50 |
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