High-Frequency Trading, Endogenous Capital Commitment and Market Quality

69 Pages Posted: 25 Oct 2019 Last revised: 21 Sep 2021

See all articles by Yenan Wang

Yenan Wang

Amsterdam Business School, University of Amsterdam

Date Written: October 9, 2019

Abstract

I study market quality implications of the competition between traditional market making and high-frequency trading. A long-run market maker responds to the competition from high-frequency traders by reducing both the spread and the amount of capital committed in market making. While a lower spread level is beneficial, less capital commitment deteriorates market quality. Specifically, the market's capacity to satisfy large demand is impaired. My model provides a more comprehensive illustration of high-frequency trading's implications on market quality by integrating both price and quantity effects. I further use this framework to analyze implications of different high-frequency trading regulatory measures.

Keywords: High-Frequency Trading, Market Quality

JEL Classification: G14

Suggested Citation

Wang, Yenan, High-Frequency Trading, Endogenous Capital Commitment and Market Quality (October 9, 2019). Available at SSRN: https://ssrn.com/abstract=3470187 or http://dx.doi.org/10.2139/ssrn.3470187

Yenan Wang (Contact Author)

Amsterdam Business School, University of Amsterdam ( email )

Roetersstraat 18
Amsterdam, 1018 WB
Netherlands

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