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

Mahendrarajah Nimalendran, Khaladdin Rzayev and Satchit Sagade

Journal of Financial Economics, 2024, vol. 159, issue C

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: High-frequency trading; Options liquidity; Hedging; Latency arbitrage; Informed trading (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:159:y:2024:i:c:s0304405x24001235

DOI: 10.1016/j.jfineco.2024.103900

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