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High Frequency Trading and the New-Market Makers

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

May 13, 2013

Journal of Financial Markets, Vol. 16, 2013

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

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Date posted: December 10, 2010 ; Last revised: December 31, 2013

Suggested Citation

Menkveld, Albert J., High Frequency Trading and the New-Market Makers (May 13, 2013). Journal of Financial Markets, Vol. 16, 2013. Available at SSRN: http://ssrn.com/abstract=1722924 or http://dx.doi.org/10.2139/ssrn.1722924

Contact Information

Albert J. Menkveld (Contact Author)
VU University Amsterdam ( email )
De Boelelaan 1105
Amsterdam, 1081HV
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)
Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
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