The speed premium: high-frequency trading and the cost of capital

September 2025 (revised October 2026)

Focus

We study how high-frequency trading (HFT) – the use of advanced technology to trade at lightning speed – affects the cost of capital that firms pay to finance their activities. While HFT is often credited with improving market liquidity, its broader impact on the real economy is less clear. To look at external shocks, we analyse a NASDAQ technological upgrade that increased HFT activity but was unrelated to company fundamentals. By comparing NASDAQ firms with matched firms on the New York Stock Exchange, we identify the causal effect of HFT on financing costs and on investment. We confirm our results by using a different shock on the NASDAQ and the Stock Exchange of Hong Kong as an out-of-sample robustness test.

Contribution

Our paper moves the debate on HFT beyond specific analysis of market quality, such as spreads or volatility, to its real economic impact. The cost of capital is a key link between financial markets and the economy: it shapes how much companies must pay to finance investment, which drives jobs, growth and productivity. Earlier studies focused mainly on HFT's effects on traders and short-term market quality, while little was known about how HFT affects companies. We show that HFT impacts the real economy through two main channels: depending on the specific characteristics of the underlying stocks it can increase systematic risk and it can improve liquidity. By showing that the effects vary with stock characteristics, we provide insights for policymakers, corporate managers, investors and researchers.

Findings

We find that HFT has a dual impact on firms' cost of capital. For low-risk (low-beta) stocks, HFT raises financing costs by making them move more closely with the overall market, thereby amplifying systematic risk. By contrast, for the most liquid stocks, HFT lowers financing costs by reducing the liquidity premium demanded by investors. On balance, the risk-increasing channel dominates – HFT raises the cost of capital on average. The effects on the cost of capital translate directly into effects on firms’ investment. To verify that our results are not driven by market fragmentation, rather than HFT per se, we conduct a complementary analysis of the Stock Exchange of Hong Kong – a large unfragmented market. This analysis confirms the patterns. Overall, our results show that the benefits and costs of HFT are unevenly distributed, raising questions about whether access to speed advantages should depend on stock characteristics rather than be applied universally.

Abstract

When trading reaches the speed of light, would the real economy slow down? Using NASDAQ’s 2010 latency upgrade as a natural experiment, we find that high-frequency trading (HFT) raises firms’ cost of capital on average. However, the effects vary across stocks. HFT increases the cost of capital for low-beta stocks by amplifying systematic risk through correlated trading strategies, while reducing it for the most liquid stocks by lowering the liquidity premium. These heterogeneous effects extend to real economic outcomes. Following the upgrade, low-beta firms reduce investment while the most liquid firms invest relatively more. Complementary tests exploiting co-location upgrades on NASDAQ and in the unfragmented Hong Kong market show that these causal effects are not driven by market fragmentation and persist across shocks, countries, and market structures.