Informed Trading in a Low-Latency Limit Order Market

We provide a novel framework of a low-latency limit order market, where informed and liquidity investors compete with a professional liquidity provider who has a monitoring advantage. We apply our model to study the impact of trading frequency and transaction costs on liquidity, trading volume, and trader welfare. Independent of trading frequency, a reduction in exogenous transaction costs leads to more market orders (over limit orders), higher volume, and a larger volume of intermediated trades. Taken together, an increase in trading frequency leads to higher volume and welfare only if exogenous costs decline sufficiently fast; otherwise volume and welfare fall.