High-frequency trading in the stock market and the costs of options market making

Mahendrarajah Nimalendran, Khaladdin Rzayev and Satchit Sagade

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We investigate how high-frequency trading (HFT) in equity markets affects options market liquidity. We find that increased aggressive HFT activity in the stock market leads to wider bid–ask spreads in the options market through two main channels. First, options market makers’ quotes are exposed to sniping risk from HFTs exploiting put–call parity violations. Second, informed trading in the options market further amplifies the impact of HFT in equity markets on the liquidity of options by simultaneously increasing the options bid–ask spread and intensifying aggressive HFT activity in the underlying market.

Keywords: hedging; high-frequency trading; informed trading; latency arbitrage; options liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2024-09-01
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Financial Economics, 1, September, 2024, 159. ISSN: 0304-405X

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:124228

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