High Frequency Market Making: The Role of Speed

63 Pages Posted: 28 Sep 2013 Last revised: 15 Dec 2021

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

National Bureau of Economic Research (NBER); Princeton University - Department of Economics

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

Multiple version iconThere are 2 versions of this paper

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

Ait-Sahalia, Yacine and Saglam, Mehmet, High Frequency Market Making: The Role of Speed (June 14, 2017). Available at SSRN: https://ssrn.com/abstract=2331613 or http://dx.doi.org/10.2139/ssrn.2331613

Yacine Ait-Sahalia (Contact Author)

National Bureau of Economic Research (NBER)

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Princeton University - Department of Economics ( email )

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HOME PAGE: http://www.princeton.edu/~yacine

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/

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