49 Pages Posted: 10 Dec 2010 Last revised: 31 Dec 2013
Date Written: May 13, 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.
Keywords: high frequency trading, market fragmentation, liquidity, market making
JEL Classification: G12
Suggested Citation: 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: https://ssrn.com/abstract=1722924 or http://dx.doi.org/10.2139/ssrn.1722924
By Frank Zhang