Liquid speed : on-demand fast trading at distributed exchanges

Trading activity surges associated with latency arbitrage are costly, as they lead to both lower liquidity and inefficient investments in order processing capacity that remains idle 90% of the time. A congestion message fee on liquidity-taking orders alleviates both concerns. The fee surges during activity bursts, as high-frequency traders (HFTs) simultaneously race to market. A higher fee limits burst intensity, which reduces adverse selection and narrows spreads. Exchanges have strong incentives to replace co-location subscriptions with congestion fees to extract higher revenues from HFTs. A calibration exercise suggests a minimum congestion fee between 15-35% of the average latency arbitrage opportunity