Download This PaperHigh Frequency Market Making: The Role of Speed
63 Pages Posted: 28 Sep 2013 Last revised: 15 Dec 2021
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High Frequency Market Making: The Role of Speed
High Frequency Traders: Taking Advantage of Speed
Date Written: June 14, 2017
Abstract
We propose a model where a strategic high frequency market maker exploits his speed and informational advantages to place quotes that interact with the market orders of low frequency traders. We characterize the optimal market making policy and the equilibrium that results. The model has testable implications regarding the impact of speed on the provision of liquidity. We
test these implications by taking advantage of a natural experiment on the NYSE American stock exchange, which implemented an intentional delay in 2017 then removed it in 2019. We find broad agreement between the empirical evidence and the implications of the model.
Keywords: High Frequency Trading, Market Making, Liquidity, Poisson Processes, Stochastic Optimal Control.
JEL Classification: G10
Suggested Citation: Suggested Citation
Yacine Ait-Sahalia (Contact Author)
Princeton University - Department of Economics ( email )
Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)
Mehmet Saglam
University of Cincinnati - Department of Finance - Real Estate ( email )
Carl H. Lindner College of Business
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)
HOME PAGE: http://homepages.uc.edu/~saglammt/