Events at CERGE-EI

Prof. Andrei Kirilenko

The Brevan Howard Centre for Financial Analysis at the Imperial College Business School, London, United Kingdom, until very recently Sloan School of Management, MIT (Massachusetts Institute of Technology), Cambridge, Massachusetts, USA

Authors: Andrei A. Kirilenko and Gui Lamacie

Abstract: We measure message processing time or latency inside an automated trading platform. We show that latency is a random variable that has a strong predictive power over both volatility and the volatility of volatility of a highly liquid asset over and above changes in message traffic. We argue that in automated markets, processing time contains valuable nontrade information about the price formation process. We recommend that automated trading platforms improve pre-trade price transparency by reporting characteristics of latency to market participants on an ongoing basis along with order book events, transaction prices, and trading volume.

Keywords:Latency, High Frequency Trading, Algorithmic Trading, Automated Markets, Liquidity, Volatility, Volatility of Volatility

JEL Classification:G10, G12, G13, G18

Full Text:  “Latency and Asset Prices”