Latency Reduction and Market Quality: The Case of the Australian Stock Exchange
Posted: 23 Apr 2016 Last revised: 16 May 2023
Date Written: September 9, 2015
Abstract
This study investigates the role of latency in market quality in the Australia Securities Exchange following the introduction of the Integrated Trading Platform (ITS) and ASXTrade. We find that the reduction in system latency from 70 miliseconds to 30 miliseconds (ITS) improved liquidity. However, the lower latency has not had a long lasting downward effect on spreads, as there was no discernible reduction in trading costs when institutional traders already had access to lower-latency co-locations. We contribute to the literature by reporting that low latency improves market liquidity, but privileged participants that have access to trading information prior to others may induce greater information asymmetry and adverse selection.
Keywords: Latency, spreads, ASXTrade, ITS, market liquidity
JEL Classification: G1
Suggested Citation: Suggested Citation