Latency Cost and Information: Does Speed Matter for All Market Participants?

Abstract

The author examines latency cost—a trading cost dimension arising from the delay in time between an order submission decision and execution—across traders with different levels of information in U.S. equities. He finds that both traders who appear informed and uninformed about future prices experience a cost induced from latency. However, the uninformed pay a significantly higher cost. The results indicate that having access to faster trading speed is beneficial, even for traders using less speed-sensitive strategies.

TOPICS: Equity portfolio management, analysis of individual factors/risk premia, security analysis and valuation