High-Frequency Traders and Single-Dealer Platforms
57 Pages Posted: 6 Jan 2021 Last revised: 24 Nov 2021
Date Written: November 29, 2020
High-frequency traders (HFTs) mainly operate on public exchanges, where multiple third-party buying and selling interests interact with each other. Following recent European regulatory changes (Markets in Financial Instruments Directive II), HFT single-dealer platforms have emerged on which HFTs conduct bilateral trading as dealers. We find that trading on HFT dealer platforms is detrimental to liquidity on public stock exchanges. HFTs manage inventory imbalances from their dealer operations by trading more aggressively and reducing their liquidity supply on exchanges, which harms liquidity.
Keywords: High-Frequency Traders, Dealers, Liquidity, Inventory Management
JEL Classification: G12, G14, G15, L10
Suggested Citation: Suggested Citation