The Value of a Millisecond: Harnessing Information in Fast, Fragmented Markets

We examine the introduction of a speed-bump by an existing exchange which provides certain participants with guaranteed speed advantages. A selective order processing delay for market orders on TSX Alpha allows low-latency liquidity providers to avoid adverse selection through their ability to react to activity on other venues. These changes increase profits for liquidity providers on TSX Alpha but negatively impact aggregate liquidity: market-wide costs for liquidity demanders increase, with liquidity suppliers’ profits reduced across remaining venues. Our findings have implications for the speed bump debate in the United States, speed differentials more generally, as well as the regulation of market linkages across fragmented trading venues.