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Automated Liquidity Provision

Austin Gerig and David Michayluk ()

No 345, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Traditional market makers are losing their importance as automated systems have largely assumed the role of liquidity provision in markets. We update the model of Glosten and Milgrom (1985) to analyze this new world: we add multiple securities and introduce an automated market maker who prices order flow for all securities contemporaneously. This automated participant transacts the majority of orders, sets prices that are more efficient, reduces spreads, and increases informed and decreases uninformed traders' transaction costs. The model's predictions match very well with recent empirical findings and are difficult to replicate with alternative models.

Keywords: algorithmic trading; automated trading; high-frequency trading; market making; specialist; statistical arbitrage (search for similar items in EconPapers)
JEL-codes: G14 G19 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2014-01-01
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (6) Track citations by RSS feed

Published as: Gerig, A. and Michayluk, D., 2017, "Automated Liquidity Provision", Pacific-Basin Finance Journal, 45, 1-13.

Downloads: (external link)
https://www.uts.edu.au/sites/default/files/rp345.pdf (application/pdf)

Related works:
Journal Article: Automated liquidity provision (2017) Downloads
Working Paper: Automated Liquidity Provision and the Demise of Traditional Market Making (2010) Downloads
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