High-Frequency Market Making: Liquidity Provision, Adverse Selection, and Competition

70 Pages Posted: 22 Nov 2017 Last revised: 5 Jun 2018

See all articles by Mario Bellia

Mario Bellia

European Union - JRC-Ispra, European Commision

Date Written: November 15, 2017

Abstract

Using data from the NYSE Euronext Paris, with a specific identifier for electronic market- making activity, I examine the role of designated liquidity providers played by high-frequency traders (HFTs) as introduced by the forthcoming MiFID II regulation. I find that HFTs do provide liquidity to the market, but strategically so, to avoid being adversely selected by other fast traders when providing liquidity to them. Conversely, when they provide liquidity to slow traders, there is no evidence of adverse selection. I exploit a change in the liquidity provision agreement that introduces more competition among market makers. I show that higher competition is beneficial for the market. Liquidity provision increases and the quoted bid-ask spread decreases, as well as the adverse selection costs faced by all traders, especially for slow traders.

Keywords: HFT, Market Makers, Liquidity Provision, Adverse Selection, Competition

JEL Classification: G12, G14

Suggested Citation

Bellia, Mario, High-Frequency Market Making: Liquidity Provision, Adverse Selection, and Competition (November 15, 2017). Available at SSRN: https://ssrn.com/abstract=3074313 or http://dx.doi.org/10.2139/ssrn.3074313

Mario Bellia (Contact Author)

European Union - JRC-Ispra, European Commision ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

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