Latency and Liquidity Risk

@article{Cartea2019LatencyAL,
  title={Latency and Liquidity Risk},
  author={{\'A}lvaro Cartea and Sebastian Jaimungal and Leandro S{\'a}nchez-Betancourt},
  journal={Capital Markets: Market Microstructure eJournal},
  year={2019}
}
Latency (i.e., time delay) in electronic markets affects the efficacy of liquidity taking strategies. During the time liquidity takers process information and send marketable limit orders (MLOs) to the exchange, the limit order book (LOB) might undergo updates, so there is no guarantee that MLOs are filled. We develop a latency-optimal trading strategy that improves the marksmanship of liquidity takers. The interaction between the LOB and MLOs is modelled as a marked point process. Each MLO… Expand
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Latency is the time delay between an exchange streaming market data to a trader, the trader processing information and deciding to trade, and the exchange receiving the order from the trader.Expand
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TLDR
The theoretical and numerical results suggest that latency can be an additional source of risk and latency impacts negatively the performance of market makers. Expand

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