High Frequency Market Making: Optimal Quoting

46 Pages Posted: 28 Sep 2013 Last revised: 1 Feb 2017

Yacine Ait-Sahalia

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

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2017

Abstract

We propose a model of market making where a strategic high frequency trader exploits his speed and informational advantages to place quotes that interact with the orders of low frequency traders. We characterize the optimal market making policy of the high frequency trader analytically. Our model shows that higher speed translates into higher profits through a more aggressive quoting policy. The optimal policy is consistent with empirically documented features of high frequency trading such as order cancellations and predatory trading.

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: Optimal Quoting (January 30, 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)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
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609-258-4015 (Phone)
609-258-5398 (Fax)

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)

HOME PAGE: http://homepages.uc.edu/~saglammt/

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