High frequency trading and the new market makers

Albert Menkveld

Journal of Financial Markets, 2013, vol. 16, issue 4, 712-740

Abstract: 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 the incumbent market and the other half on a small, high-growth entrant market. Its trade participation rate in these markets is 8.1% and 64.4%, respectively. In both markets, four out of five of its trades are passive i.e., its price quote was consumed by others.

Keywords: High frequency trading; Market maker; Multiple markets (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (267)

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Related works:
Working Paper: High Frequency Trading and the New-Market Makers (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:16:y:2013:i:4:p:712-740

DOI: 10.1016/j.finmar.2013.06.006

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