We exploit an optional colocation upgrade at NASDAQ OMX Stockholm to assess how speed affects market liquidity. Liquidity improves for the overall market and even for noncolocated trading entities. We find that the upgrade is pursued mainly by participants who engage in market making. Those that...

The effective bid-ask spread measured relative to the spread midpoint overstates the true effective bid-ask spread in markets with discrete prices and elastic liquidity demand. The average bias is 13-18% for S&P 500 stocks in general, depending on the estimator used as benchmark, and up to 97%...

We study performance and competition among high-frequency traders (HFTs). We construct measures of latency and find that differences in relative latency account for large differences in HFTs' trading performance. HFTs that improve their latency rank due to colocation upgrades see improved...

This paper investigates whether investors are compensated for taking on commonality risk in equity portfolios. A large literature documents the existence and the causes of commonality in illiquidity, but the implications for investors are less understood. In a more than fifty year long sample of...

Financially constrained firms can use hedging to lower the risk of financial distress. However, spending scarce resources on hedging exacerbates the underinvestment problem of these firms. We develop a model in which this cost of hedging is traded off against a reduction in the risk of being...

Volatility extensions in closing auctions are designed to improve the efficiency of the closing price. We hypothesize that the channel for the efficiency increase is that extensions improve market integrity and investor trust in the auction mechanism. We confirm that the introduction of a...

Information arrives at securities markets through price quotes and trades. Informed traders impose adverse-selection costs on quote suppliers. This creates incentives for the latter to identify relatively uninformed groups and trade with them off-exchange. The marketplace turns hybrid, at the...