Template-Type: ReDIF-Paper 1.0
Author-Name: Matteo Aquilina
Author-X-Name-First: Matteo
Author-X-Name-Last: Aquilina
Author-Name: Gbenga Ibikunle
Author-X-Name-First: Gbenga
Author-X-Name-Last: Ibikunle
Author-Name: Khaladdin Rzayev
Author-X-Name-First: Khaladdin
Author-X-Name-Last: Rzayev
Author-Name: Xuesi Wang
Author-X-Name-First: Xuesi
Author-X-Name-Last: Wang
Title: The speed premium: high-frequency trading and the cost of capital
Abstract: When trading in financial markets reaches light speed, does the real economy slow down? Using co-location and latency improvement upgrades at NASDAQ as natural experiments, we find that, on average, high frequency trading (HFT) leads to higher cost of capital. However, the impact is not uniform. HFT raises the cost of capital for low-beta stocks by amplifying their systematic risk, as HFT's correlated trading strategies make these stocks more responsive to market-wide information. For the most liquid stocks, HFT reduces the cost of capital by lowering the liquidity premium required by investors. A complementary test using data from the unfragmented Hong Kong market shows that these causal effects are not due to market fragmentation and persist across countries and market structures. Our results demonstrate that HFT's real economic effects are heterogeneous across stock characteristics, with important implications for financial market regulation and policy design.
Creation-Date: 2025-09
File-URL: https://www.bis.org/publ/work1290.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1290.htm
File-Format: text/html
Number: 1290
Keywords: high frequency trading, cost of capital, financial innovation, liquidity, systematic risk
Classification-JEL: G12, G14, G15
Handle: RePEc:bis:biswps:1290