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Automated Liquidity Provision

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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 ow for all securities contemporaneously. This automated participant transacts the majority of orders, sets prices that are more ecient, reduces spreads, and increases informed and decreases uninformed traders' transaction costs. The model's predictions match very well with recent empirical ndings and are dicult to replicate with alternative models.

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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp345.pdf
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Bibliographic Info

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 345.

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Length: 34 pages
Date of creation: 01 Jan 2014
Date of revision:
Handle: RePEc:uts:rpaper:345

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Keywords: algorithmic trading; automated trading; high-frequency trading; market making; specialist; statistical arbitrage;

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  4. Hakansson, Nils H & Beja, Avraham & Kale, Jivendra, 1985. " On the Feasibility of Automated Market Making by a Programmed Specialist," Journal of Finance, American Finance Association, vol. 40(1), pages 1-20, March.
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