High Frequency Trading and the New-Market Makers

  title={High Frequency Trading and the New-Market Makers},
  author={Albert J. Menkveld},
  journal={European Finance eJournal},
  • A. Menkveld
  • Published 13 May 2013
  • Economics, Business
  • European Finance eJournal
This paper characterizes the trading strategy of a large high-frequency trader (HFT). The HFT incurs a loss on its inventory but earns a profit on the bid-ask spread. Sharpe ratio calculations show that performance is very sensitive to cost of capital assumptions. The HFT employs a cross-market strategy as half of its trades materialize on a large incumbent market and the other half on a small, high-growth entrant market. Trade participation rates are 8.1% and 64.4%, respectively. In both… 



The Diversity of High-Frequency Traders

The regulatory debate concerning high-frequency trading (HFT) emphasizes the importance of distinguishing different HFT strategies and their influence on market quality. Using data from NASDAQ-OMX

High Frequency Trading and Price Discovery

We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in

Very Fast Money: High-Frequency Trading on the NASDAQ

This paper provides evidence regarding high-frequency trader (HFT) trading performance, trading costs, and effects on market efficiency using a sample of NASDAQ trades and quotes that directly

The Trades of Market Makers: An Empirical Analysis of NYSE Specialists

This paper presents a transaction-level empirical analysis of the trading activities of New York Stock Exchange specialists. The main findings of the analysis are the following: adjustment lags in

A Dynamic Limit Order Market with Fast and Slow Traders

We study the role of high-frequency trading in a dynamic limit order market. Being fast is valuable because it enables traders to revise outstanding limit orders upon news arrivals when interacting

Trading Volume and Asset Liquidity

The existence of a centralized market does not in itself guarantee that an asset can be readily liquidated at no loss: if the market is not deep enough, traders will experience adverse changes in the

Need for Speed: An Empirical Analysis of Hard and Soft Information in a High Frequency World

It is demonstrated that speed matters for hard information processing and realizing trading gains because of high short-run trading pro fits and HFTs dominate non-HFTs in processing hard information by exhibiting a stronger reaction after the hard information shocks.

Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market

We study the impact of algorithmic trading in the foreign exchange market using a long time series of high-frequency data that specifically identifies computer-generated trading activity. Using both

Liquidity Cycles and Make/Take Fees in Electronic Markets

We develop a model of trading in securities markets with two specialized sides: traders posting quotes ("market makers") and traders hitting quotes ("market takers"). Liquidity cycles emerge