Abstract

https://ssrn.com/abstract=2331613
 


 



High Frequency Market Making: Optimal Quoting


Yacine Ait-Sahalia


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

Mehmet Sağlam


University of Cincinnati - Department of Finance - Real Estate

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.

Number of Pages in PDF File: 46

Keywords: High Frequency Trading, Market Making, Liquidity, Poisson Processes, Stochastic Optimal Control.

JEL Classification: G10


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Date posted: September 28, 2013 ; Last revised: February 1, 2017

Suggested Citation

Ait-Sahalia, Yacine and Sağlam, 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

Contact Information

Yacine Ait-Sahalia (Contact Author)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Princeton University - Department of Economics ( email )
Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)

Mehmet Sağlam
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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