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

Alex Frino, Vito Mollica, Robert I. Webb

Research output: Chapter in Book/Report/Conference proceedingConference proceeding contribution

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 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.
Original languageEnglish
Title of host publicationProceedings of the Commodity Futures Trading Commission (CFTC) Research Conference
Place of PublicationWashington DC
PublisherCommodity Futures Trading Commission (CFCT)
Pages1-24
Number of pages24
Publication statusPublished - 2012
EventCommodity Futures Trading Commission Research Conference - Washington DC
Duration: 30 Nov 201230 Nov 2012

Conference

ConferenceCommodity Futures Trading Commission Research Conference
CityWashington DC
Period30/11/1230/11/12

    Fingerprint

Cite this

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).