Strategic Liquidity Supply in a Market with Fast and Slow Traders

McInish, Thomas H.; Upson, James

doi:10.2139/ssrn.1924991

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Strategic Liquidity Supply in a Market with Fast and Slow Traders

49 Pages Posted: 9 Sep 2011 Last revised: 19 Mar 2012

See all articles by Thomas H. McInish

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

James Upson

University of Texas at El Paso

Date Written: March 1, 2012

Abstract

Modern equity markets have both fast traders such as dealers, market makers, and high frequency traders and slow traders such as retail clients. We model and show empirically that latency differences allow fast liquidity suppliers to pick off slow liquidity demanders at prices inferior to the NBBO. This trading strategy is highly profitable for the fast traders. We estimate that the fast traders earn more than $233 million per year at the expense of the slow traders. Investigating the decrease in NYSE latency on 10 March 2010, we also show that when this market became faster, execution quality improved markedly for fast liquidity demanders, but improved only minimally for slow liquidity demanders.

Keywords: Regulation NMS, Limit Order, Quote Update, Trade Execution Quality

JEL Classification: G14, G18, G19

Suggested Citation: Suggested Citation

McInish, Thomas H. and Upson, James, Strategic Liquidity Supply in a Market with Fast and Slow Traders (March 1, 2012). Available at SSRN: https://ssrn.com/abstract=1924991 or http://dx.doi.org/10.2139/ssrn.1924991