Do speed bumps curb low-latency trading? Evidence from a laboratory market

TL;DR

This study uses a laboratory market experiment to examine how different types of speed bumps affect traders' investment in low-latency technology, revealing limited impact of asymmetric speed bumps and no effect of symmetric ones.

Contribution

It provides experimental evidence on the effectiveness of speed bumps in curbing low-latency trading investments, a topic with limited real-world data.

Findings

Asymmetric speed bumps reduce investment by 20%.

Increasing speed bump size by one standard deviation reduces investment by 8.33%.

Symmetric speed bumps do not affect investment levels.

Abstract

Exchanges implement intentional trade delays to limit the harmful impact of low-latency trading. Do such "speed bumps" curb investment in fast trading technology? Data is scarce since trading technologies are proprietary. We build an experimental trading platform where participants face speed bumps and can invest in fast trading technology. We find that asymmetric speed bumps, on average, reduce investment in speed by only 20%. Increasing the magnitude of the speed bump by one standard deviation further reduces low-latency investment by 8.33%. Finally, introducing a symmetric speed bump leads to the same investment level as no speed bump at all.