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The Impact of Co-Location of Securities Exchanges' and Traders' Computer Servers on Market Liquidity

Authors

  • Alex Frino,

    1. Alex Frino and Vito Mollica are co-located at the Macquarie Graduate School of Management, Macquarie Park, New South Wales, Australia
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  • Vito Mollica,

    Corresponding author
    1. Alex Frino and Vito Mollica are co-located at the Macquarie Graduate School of Management, Macquarie Park, New South Wales, Australia
    • Correspondence author, Macquarie Graduate School of Management, Macquarie University, Macquarie Park, NSW 2109, Australia. Tel: +61-2-9850-9097, Fax: +61-2-9850-9019, e-mail: vito.mollica@mgsm.edu.au

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  • Robert I. Webb

    1. Robert I. Webb is at the University of Virginia, Charlottesville, Virginia, USA
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  • We would like to thank Carole Gresse, Björn Hagströmer and Lars Nordén as well as participants at the U.S Commodity Futures Trading Commission Research and FMA European Conferences, and the Stockholm University finance and Capital Markets CRC seminars for useful comments. We especially thank the Securities Industry Research Centre of Asia Pacific for data and technical support. Any errors or omissions are the responsibility of the authors alone.

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. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:20–33, 2014

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