The impact of co-location of securities exchanges' and traders' computer servers on market liquidity

Alex Frino, Vito Mollica*, Robert I. Webb

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

27 Citations (Scopus)

Abstract

This study examines the impact of allowing traders to co-locate their servers near exchange servers on the liquidity of futures contracts traded on the Australian Securities Exchange. It provides evidence of an increase in proxies for high-frequency trading activity following the introduction of co-location. There is strong evidence of a decrease in bid-ask spreads and an increase in market depth after the introduction of co-location. We conclude that the introduction of co-location enhances liquidity. We conjecture that co-location improves the efficiency with which liquidity providers (including market maker high-frequency traders) are able to make markets.

Original languageEnglish
Pages (from-to)20-33
Number of pages14
JournalThe Journal of Futures Markets
Volume34
Issue number1
DOIs
Publication statusPublished - Jan 2014

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