50 Pages Posted: 1 Jun 2020
Date Written: February 1, 2020
We investigate the role of high-frequency traders (HFTs) in option market making. We show that, overall, HFTs in the underlying market increase the spread and reduce liquidity in option markets through their liquidity-demanding orders. By contrast, the option spread is not impacted by the additional hedging opportunities stemming from HFTs’ liquidity-providing orders because they impose on the option market maker the risk of trading at stale prices in a cross-market setting.
Keywords: market microstructure, high-frequency trading, option market making, liquidity
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation