Competition among liquidity providers with access to high-frequency trading technology

• 成果类型: Article
• 署名作者: Bongaerts, Dion; Van Achter, Mark
• 署名单位: Erasmus University Rotterdam; Erasmus University Rotterdam - Excl Erasmus MC; KU Leuven
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2020.11.002
• 发表日期: 2021
• 页码: 220-249
• 关键词: Adverse selection; liquidity; Latency; Informed trading; Trading technology

摘要

We model endogenous technology adoption and competition among liquidity providers with access to High-Frequency Trading (HFT) technology. HFT technology provides speed and information advantages. Information advantages may restore excessively toxic markets. Speed advantages may reduce resource costs for liquidity provision. Both effects increase liquidity and welfare. However, informationally advantaged HFTs may impose a winner's curse on traditional market makers, who in response reduce their participation. This increases resource costs and lowers the execution likelihood for market orders, thereby reducing liquidity and welfare. This result also holds when HFT technology dominates traditional technology in terms of costs and informational advantages. (C) 2020 Elsevier B.V. All rights reserved.