The Term Structure of Liquidity Provision

38 Pages Posted: 11 Sep 2016 Last revised: 8 Aug 2018

See all articles by Jennifer S. Conrad

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School

Sunil Wahal

Arizona State University (ASU) - Finance Department

Date Written: August 5, 2018

Abstract

We examine the term structure of realized spreads from 100 milliseconds to 600 seconds after each trade in all common stocks from 2010-2017. The term structure is sharply downward sloping, implying that (a) market maker profitability is sensitive to speed, and (b) the choice of the horizon of measurement is critical when drawing inferences from realized spreads. All measures of net profits to liquidity provision decline over the sample period even at the shortest horizons that we consider: at the 100-millisecond horizon, aggregate profits decline from 1.9 basis points of total dollar volume in 2010 to 1.0 basis points in 2017. The data suggest increasing competition in electronic market-making over the sample period, including the most recent years in the sample.

Keywords: High frequency trading, market microstructure, market efficiency

JEL Classification: G12, G14

Suggested Citation

Conrad, Jennifer S. and Wahal, Sunil, The Term Structure of Liquidity Provision (August 5, 2018). Available at SSRN: https://ssrn.com/abstract=2837111 or http://dx.doi.org/10.2139/ssrn.2837111

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Sunil Wahal (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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