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 some evidence of an increase in proxies for HFT activity following the introduction of colocation including raw message traffic, order-to-trade ratios and the volume associated with message traffic to trading volume. The paper also provides 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. Furthermore, this improvement in liquidity is not dependent on an increase in HFT activity. We conjecture that colocation improves the efficiency with which liquidity providers (including market maker HFTs) are able to make markets. We also provide estimates of the value of the improvement in liquidity to the broader market.
|Title of host publication||Proceedings of the Commodity Futures Trading Commission (CFTC) Research Conference|
|Place of Publication||Washington DC|
|Publisher||Commodity Futures Trading Commission (CFCT)|
|Number of pages||24|
|Publication status||Published - 2012|
|Event||Commodity Futures Trading Commission Research Conference - Washington DC|
Duration: 30 Nov 2012 → 30 Nov 2012
|Conference||Commodity Futures Trading Commission Research Conference|
|Period||30/11/12 → 30/11/12|
Frino, A., Mollica, V., & Webb, R. I. (2012). The Impact of co-location of securities exchanges' and traders' computer servers on market liquidity. In Proceedings of the Commodity Futures Trading Commission (CFTC) Research Conference (pp. 1-24). Washington DC: Commodity Futures Trading Commission (CFCT).