Does Low Latency Trading Improve Market Efficiency? A Discussion

Erhard, Ryan; Sloan, Richard G.

doi:10.2139/ssrn.3765216

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Does Low Latency Trading Improve Market Efficiency? A Discussion

Journal of Accounting & Economics (JAE), Vol. 70, No. 2-3, 2020

21 Pages Posted: 11 Feb 2021

See all articles by Ryan Erhard

Ryan Erhard

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Date Written: July 31, 2020

Abstract

Chordia and Miao (2020) provide evidence that low-latency trading (LLT) improves the long-term informational efficiency of stock prices. This discussion raises two primary concerns with their analysis. First, the mechanism through which LLT enhances long-term efficiency is unclear. Second, CM's measure of LLT trading activity is correlated with non-LLT trading activity, which may in turn cause the documented improvements in efficiency. We close by proposing an alternative explanation—changes in market microstructure have had a bifurcated impact on liquidity, enhancing efficiency for large and liquid stocks, but not for small and illiquid stocks.

Keywords: Low-Latency Trading, Liquidity, Market Efficiency, Earnings Announcements, Post-Earnings Announcement Drift

JEL Classification: M41, G14

Suggested Citation: Suggested Citation

Erhard, Ryan and Sloan, Richard G., Does Low Latency Trading Improve Market Efficiency? A Discussion (July 31, 2020). Journal of Accounting & Economics (JAE), Vol. 70, No. 2-3, 2020, Available at SSRN: https://ssrn.com/abstract=3765216 or http://dx.doi.org/10.2139/ssrn.3765216