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High frequency market making: The role of speed

Author

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  • Aït-Sahalia, Yacine
  • Sağlam, Mehmet

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.

Suggested Citation

  • Aït-Sahalia, Yacine & Sağlam, Mehmet, 2024. "High frequency market making: The role of speed," Journal of Econometrics, Elsevier, vol. 239(2).
    • Handle: RePEc:eee:econom:v:239:y:2024:i:2:s0304407623000581
    DOI: 10.1016/j.jeconom.2022.12.015
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