Automated Liquidity Provision

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

Austin Gerig

U.S. Securities and Exchange Commission

David Michayluk

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

Date Written: December 1, 2014

Abstract

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: https://ssrn.com/abstract=1639954 or http://dx.doi.org/10.2139/ssrn.1639954

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)

HOME PAGE: http://www.austingerig.com

David Michayluk

University of Technology Sydney ( email )

Finance Discipline Group
UTS Business
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

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

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

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