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High frequency trading and the new market makers

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  • Menkveld, Albert J.

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 the incumbent market and the other half on a small, high-growth entrant market. Its trade participation rate in these markets is 8.1% and 64.4%, respectively. In both markets, four out of five of its trades are passive i.e., its price quote was consumed by others.

Suggested Citation

  • Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
  • Handle: RePEc:eee:finmar:v:16:y:2013:i:4:p:712-740
    DOI: 10.1016/j.finmar.2013.06.006
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    More about this item

    Keywords

    High frequency trading; Market maker; Multiple markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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