The Effects of High Frequency Trading in a Multi-Asset Model

Gerig, Austin and Michayluk, David (2011) The Effects of High Frequency Trading in a Multi-Asset Model. In: Cabdyn Complexity Centre Seminar Series, October 2011, University of Oxford, UK. (Unpublished)

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High frequency traders have largely replaced human liquidity providers in US equity markets. This has increased market efficiency, reduced transaction costs, and increased
volumes. We develop a model that can explain how and why this has occurred:
-Similar to the Glosten and Milgrom (1985) model, but with multiple securities.
-We add an automated market maker who trades across securities and understands the relationships between their end-of-period values.
-This new participant:
1. Transacts the majority of orders.
2. Makes prices more efficient.
3. Increases informed and decreases uninformed traders transaction costs.
-As a result:
1. Volumes increase.
2. Overall transaction costs are reduce

Item Type: Conference or Workshop Item (Paper)
Keywords: Liquidity; Market efficiency; Trading; Models
Subject(s): Complexity
Centre: CABDyN Complexity Centre
Date Deposited: 05 Mar 2012 20:00
Last Modified: 23 Oct 2015 14:07

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