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

We examine the introduction of an asymmetric, randomized speed bump that allows low-latency liquidity providers to avoid order-flow driven adverse selection by reacting to activity on other venues. The speed bump segments order flow and increases profits for fast liquidity providers on that venue at the expense of other liquidity providers and aggregate market quality. The negative effects are concentrated in stocks more exposed to immediate adverse selection ex-ante. Our findings have implications for speed differentials and the regulation of market linkages across fragmented trading venues