Make-Take Decisions under High-Frequency Trading Competition

60 Pages Posted: 27 Feb 2019 Last revised: 29 Apr 2019

Date Written: February 17, 2019

Abstract

The make-take preferences of investors depend on high-frequency trading (HFT) competition, under which HFT firms endogenously acquire speed and informational advantages. In the case where there are many HFT firms in the market, they compete more through limit orders; meanwhile, in the case with few HFT firms, they compete more through market orders that "pick-off" limit orders coming from the big crowd of slow traders. In the former (latter) case, additional HFT competition improves (damage) liquidity. In both cases, HFT competition improves informational efficiency and reduces microstructure noise. Finally, I use the model to analyze potential regulations under HFT competition.

Keywords: make-take decisions, high-frequency trading competition, limit order market, market quality, welfare

JEL Classification: C63, C73, G11, G14

Suggested Citation

Bernales, Alejandro, Make-Take Decisions under High-Frequency Trading Competition (February 17, 2019). Available at SSRN: https://ssrn.com/abstract=3336257 or http://dx.doi.org/10.2139/ssrn.3336257

Alejandro Bernales (Contact Author)

Universidad de Chile ( email )

Diagonal Paraguay 257
Santiago
Chile

HOME PAGE: http://www.alejandrobernales.com

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