Automated Liquidity Provision and the Demise of Traditional Market Making

Gerig, Austin (2011) Automated Liquidity Provision and the Demise of Traditional Market Making. In: FMA Annual Conference, October 2011, Denver, Colorado. (Unpublished)

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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 uses the relationships between securities to price order flow. This new automated participant transacts the majority of orders, sets prices that are more efficient, and increases informed and decreases uninformed traders' transaction costs. These results can explain the recent dominance of high frequency trading in US markets and the corresponding increase in trading volume and decrease in transaction costs for US stocks.

Item Type: Conference or Workshop Item (Paper)
Keywords: Algorithmic Trading; Automated Trading; High Frequency Trading; Market Making; Specialist; Statistical Arbitrage
Subject(s): Complexity
Centre: CABDyN Complexity Centre
Date Deposited: 05 Mar 2012 20:13
Last Modified: 23 Oct 2015 14:07
URI: http://eureka.sbs.ox.ac.uk/id/eprint/2733

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