Latency reduction and market quality: The case of the Australian Stock Exchange

•The Australia Securities Exchange (ASX) introduced two new platforms to reduce latency.•We investigate the impact of the latency reductions in the ASX on market quality.•We find that the first upgraded platform improved liquidity, but the second does not.•The study implies that low latency improves market liquidity.•But the fairness and integrity of the system is necessary to secure the improvement.

This study investigates the role of latency in market quality in the Australia Securities Exchange following the introduction of the Integrated Trading Platform (ITS) and ASXTrade. We find that the reduction in system latency from 70 ms to 30 ms (ITS) improved liquidity. However, the lower latency has not had a long-lasting downward effect on spreads, as there was no discernible reduction in trading costs when institutional traders already had access to lower-latency co-locations. We contribute to the literature by reporting that low latency improves market liquidity, but privileged participants that have access to trading information prior to others may induce greater information asymmetry and adverse selection.