The Term Structure of Liquidity Provision
38 Pages Posted: 11 Sep 2016 Last revised: 8 Aug 2018
Date Written: August 5, 2018
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: Suggested Citation