Competition among Liquidity Providers with Access to High-Frequency Trading Technology

89 Pages Posted: 4 Dec 2015 Last revised: 4 Feb 2020

See all articles by Dion Bongaerts

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance

Date Written: February 4, 2020

Abstract

We model endogenous technology adoption and competition among liquidity providers with access to High-Frequency Trading (HFT) technology. HFT technology provides speed and informational advantages. Information advantages may restore excessively toxic markets. Speed technology may reduce resource costs for liquidity provision. Both effects increase liquidity and welfare. However, informationally advantaged HFTs may impose a winner's curse on traditional market makers, who in response reduce their participation. This increases resource costs and lowers the execution likelihood for market orders, thereby reducing liquidity and welfare. This result also holds when HFT dominates traditional technology in terms of costs and informational advantages.

Keywords: Adverse Selection, Liquidity, Latency, Informed Trading, Trading Technology

JEL Classification: D53, G01, G10, G18

Suggested Citation

Bongaerts, Dion and Van Achter, Mark, Competition among Liquidity Providers with Access to High-Frequency Trading Technology (February 4, 2020). Available at SSRN: https://ssrn.com/abstract=2698702 or http://dx.doi.org/10.2139/ssrn.2698702

Dion Bongaerts (Contact Author)

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 40 82 953 (Phone)
+31 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/mvanachter

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