46 Pages Posted: 28 Sep 2013 Last revised: 1 Feb 2017
Date Written: January 30, 2017
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: 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