Fast Traders Make a Quick Buck: The Role of Speed in Liquidity Provision

In modern public equity markets, liquidity is provided by a heterogeneous set of traders with vastly different speeds. We study the consequences of information arrival in such a setting. We present a model that predicts faster traders achieve a relative increase in profits obtained from liquidity provision following information events through (i) avoiding adverse selection by canceling mispriced quotes, and (ii) winning the race to post updated quotes. We also find strong support for these model predictions using data from the Toronto Stock Exchange. The identification strategy is based on an unanticipated “fake news” event in which the Twitter feed of the Associated Press falsely reported a terrorist attack.