The Impact of Co-Location of Securities Exchanges ' and Traders ' Computer Servers on Market Liquidity

摘要

This study examines the impact of allowing traders to co-locate their servers near exchange servers on the liquidity of futures contracts traded on the Australian Securities Exchange. It provides evidence of an increase in proxies for high-frequency trading activity following the introduction of co-location. There is strong evidence of a decrease in bid-ask spreads and an increase in market depth after the introduction of co-location. We conclude that the introduction of co-location enhances liquidity. We conjecture that co-location improves the efficiency with which liquidity providers (including market maker high-frequency traders) are able to make markets.