A Tale of Two Cities
Authors: Satchit Sagade (Goethe University and SAFE), Stefan Scharnowski (University of Mannheim), Erik Theissen (University of Mannheim and CFR Cologne), and Christian Westheide (University of Mannheim and SAFE)
Title: A Tale of Two Cities
Abstract: We study the introduction of the first commercially available microwave link between London and Frankfurt. The new link leads to an exogenous reduction in latencies for the fastest traders. A control group of similar stocks not directly affected by the link allows us to isolate the effect of differences in trading speed. Generally, volatility decreases and price efficiency increases after the new link is available. The results are substantially stronger for smaller, less liquid stocks. Liquidity tends to improve for smaller stocks, but decreases for larger stocks due to an increase in adverse selection costs.