High frequency market making: The role of speed

Yacine Aït-Sahalia, Mehmet Sağlam

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

We propose a model where a strategic high frequency market maker exploits his speed and informational advantages to place quotes that interact with the market orders of low frequency traders. We characterize the optimal market making policy and the equilibrium that results. The model has testable implications regarding the impact of speed on the provision of liquidity. We test these implications by taking advantage of a natural experiment on the NYSE American stock exchange, which implemented an intentional delay in 2017 then removed it in 2019. We find broad agreement between the empirical evidence and the implications of the model.

Original languageEnglish (US)
JournalJournal of Econometrics
DOIs
StateAccepted/In press - 2023

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • High frequency trading
  • Inventory control
  • Liquidity
  • Market making
  • Market quality
  • Speed bump
  • Stochastic optimal control

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