Speed, distance, and electronic trading: New evidence on why location matters

We examine the execution quality of electronic stock traders who are geographically dispersed throughout the United States. Traders who are located near market central computers in the New York City area experience faster order execution. Moreover, the time to execute orders rises as a trader's actual distance (mileage) to NYC widens. In electronic market settings, data transfer limitations and transmission slowdowns result in geographically-dispersed electronic traders having different access to trading speed. We find that speed differences are costly to traders and that speed-advantaged traders engage in strategies that are more conducive to speed.