High Frequency Trading and the New-Market Makers
Preprint
- 1 January 2012
- preprint
- Published by Elsevier in SSRN Electronic Journal
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 a large incumbent market and the other half on a small, high-growth entrant market. Trade participation rates are 8.1% and 64.4%, respectively. In both markets, about four out of five of its trades are passive, i.e., its price quote was consumed by others.Keywords
All Related Versions
This publication has 29 references indexed in Scilit:
- International Evidence on Algorithmic TradingSSRN Electronic Journal, 2012
- Very Fast Money: High-Frequency Trading on the NASDAQSSRN Electronic Journal, 2012
- Where is the Value in High Frequency Trading?SSRN Electronic Journal, 2011
- Rise of the Machines: Algorithmic Trading in the Foreign Exchange MarketSSRN Electronic Journal, 2011
- High Frequency Trading and Market QualitySSRN Electronic Journal, 2010
- Market Liquidity and Funding LiquidityThe Review of Financial Studies, 2008
- Equilibrium and welfare in markets with financially constrained arbitrageursPublished by Elsevier ,2002
- Fourier Analysis of Time SeriesWiley Series in Probability and Statistics, 2000
- An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris BourseThe Journal of Finance, 1995
- Bid, ask and transaction prices in a specialist market with heterogeneously informed tradersJournal of Financial Economics, 1985