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File name: SSRN-id2264925. ; Size: 414K
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High Frequency Trading and the New-Market Makers
Albert J. Menkveld
VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Duisenberg School of Finance
May 13, 2013
AFA 2012 Paper
EFA 2011 Paper
Abstract:
This paper characterizes the trading strategy of a large high-frequency trader (HFT). The HFT incurs a loss on its inventory but earns a profit on the bid-ask spread. Sharpe ratio calculations show that performance is very sensitive to cost of capital assumptions. The HFT employs a cross-market strategy as half of its trades materialize on a large incumbent market and the other half on a small, high-growth entrant market. Trade participation rates are 8.1% and 64.4%, respectively. In both markets, about four out of five of its trades are passive, i.e., its price quote was consumed by others.
Number of Pages in PDF File: 49
Keywords: high frequency trading, market fragmentation, liquidity, market making
JEL Classification: G12
working papers series
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Date posted: December 10, 2010
; Last revised: May 14, 2013
Suggested CitationMenkveld, Albert J., High Frequency Trading and the New-Market Makers (May 13, 2013). EFA 2011 Paper; AFA 2012 Paper; EFA 2011 Paper. Available at SSRN: http://ssrn.com/abstract=1722924 or http://dx.doi.org/10.2139/ssrn.1722924
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