@article{4711bdbc3fce4881ac540f8f4366fcab,
title = "Why trading speed matters: A tale of queue rationing under price controls",
abstract = "We show that queue rationing under price controls is one driver of high-frequency trading. Uniform tick sizes constrain price competition and create rents for liquidity provision, particularly for securities with lower prices. The time priority rule allocates rents to highfrequency traders (HFTs) because of their speed advantage. An increase in relative tick size, defined as uniform tick sizes divided by security prices, increases the fraction of liquidity provided by HFTs but harms liquidity. We find that the message-to-trade ratio is a poor cross-sectional proxy for HFTs' liquidity provision: stocks with more liquidity provided by HFTs have lower message-to-trade ratios.",
author = "Chen Yao and Mao Ye",
note = "Funding Information: We thank Jim Angel, Shmuel Baruch, Robert Battalio, Dan Bernhardt, Hank Bessembinder, Jonathan Brogaard, Eric Budish, John Campbell, Amy Edwards, Thierry Foucault, Harry Feng, Slava Fos, George Gao, Paul Gao, Arie Gozluklu, Joel Hasbrouck, Frank Hathaway, Terry Hendershott, Bj{\"o}rn Hagstr{\"o}mer, Yesol Huh, Avner Kalay, J{\'a}nos Kornai, Pankaj Jain, Tim Johnson, Charles Jones, Andrew Karolyi, Nolan Miller, Katya Malinova, Steward Mayhew, Albert Menkveld, Maureen O{\textquoteright}Hara, Neil Pearson, Richard Payne, Andreas Park, Ioanid Rosu, Gideon Saar, Jeff Smith, Duane Seppi, Chester Spatt, Clara Vega, Ingrid Werner, Bart Yueshen, and Haoxiang Zhu and seminar participants at the University of Illinois, HEC Paris, the SEC, CFTC/American University, Chinese University of Hong Kong, JP Morgan, the Utah Winter Finance Conference, WFA, NBER Market Microstructure Meeting, EFA, the Midway Market Design Workshop (Chicago Booth), and Market Microstructure: Confronting many Viewpoints Conference in Paris for their helpful suggestions. We thank NASDAQ OMX for providing the data. Ye acknowledges support from National Science Foundation [1352936] (with the Office of Financial Research at U.S. Department of the Treasury) and the Extreme Science and Engineering Discovery Environment (XSEDE). We thank Robert Sinkovits, Choi Dongju, and David O{\textquoteright}Neal for their assistance with supercomputing, supported by the XSEDE Extended Collaborative Support Service program. We thank Jiading Gai, Chenzhe Tian, Rukai Lou, Tao Feng, Yingjie Yu, Hao Xu, and Chao Zi for their excellent research assistance. Send correspondence to Mao Ye, University of Illinois at Urbana-Champaign, 340 Wohlers Hall, 1206 South 6th Street, Champaign, IL 61820. E-mail: maoye@illinois.edu. Publisher Copyright: {\textcopyright} The Author(s) 2018.",
year = "2018",
month = jun,
day = "1",
doi = "10.1093/rfs/hhy002",
language = "English (US)",
volume = "31",
pages = "2157--2183",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
number = "6",
}