Automated Liquidity Provision

42 Pages Posted: 15 Jul 2010 Last revised: 20 Jan 2015

See all articles by Austin Gerig

Austin Gerig

U.S. Securities and Exchange Commission

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Date Written: December 1, 2014


Traditional market makers are losing their importance as automated systems have largely assumed the role of liquidity provision in markets. We update the model of Glosten and Milgrom (1985) to analyze this new world: we add multiple securities and introduce an automated market maker who prices order flow for all securities contemporaneously. This automated participant transacts the majority of orders, sets prices that are more efficient, increases informed and decreases uninformed traders' transaction costs, and has no effect on volatility. The model's predictions match very well with recent empirical findings and are difficult to replicate with alternative models.

Keywords: Algorithmic Trading, Automated Trading, High Frequency Trading, Market Making, Specialist, Statistical Arbitrage

JEL Classification: G14, G19

Suggested Citation

Gerig, Austin and Michayluk, David, Automated Liquidity Provision (December 1, 2014). Available at SSRN: or

Austin Gerig (Contact Author)

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
United States
202-551-4575 (Phone)


David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Finance Discipline Group
UTS Business
Sydney, NSW 2007

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000

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