Liquidity with High-Frequency Market Making

12 Pages Posted: 27 Mar 2014 Last revised: 28 Mar 2014

See all articles by Jungsuk Han

Jungsuk Han

Seoul National University - College of Business Administration; Finance Theory Group (FTG)

Mariana Khapko

University of Toronto - Finance Area; Swedish House of Finance

Albert S. Kyle

University of Maryland

Date Written: March 26, 2014

Abstract

We study a simple model of market making in which high-frequency market makers can cancel limit orders quickly after receiving an adverse signal. The resulting winner's curse induces low-frequency market makers to widen bid-ask spreads. Liquidity in the market may deteriorate unless high-frequency market makers fully replace low-frequency market makers in liquidity provision. Our result suggests that some restrictions on high-frequency trading, such as minimum resting times, may improve market liquidity by leveling the playing field among market makers with different speeds.

Keywords: high-frequency trading, market making, order cancellation, bid-ask spread, winner's curse, informed trading

JEL Classification: D82, G14, G18

Suggested Citation

Han, Jungsuk and Khapko, Mariana and Kyle, Albert (Pete) S., Liquidity with High-Frequency Market Making (March 26, 2014). Swedish House of Finance Research Paper No. 14-06, Available at SSRN: https://ssrn.com/abstract=2416396 or http://dx.doi.org/10.2139/ssrn.2416396

Jungsuk Han (Contact Author)

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Finance Theory Group (FTG) ( email )

United States

Mariana Khapko

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm
Sweden

Albert (Pete) S. Kyle

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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