Large-caps liquidity provision, market liquidity and high-frequency market makers’ trading behaviour

2021 ◽  
pp. 1-21
Author(s):  
Mingfa Ding ◽  
Sandy Suardi ◽  
Caihong Xu ◽  
Dong Zhang
Keyword(s):  
High Frequency ◽  
Market Liquidity ◽  
Market Makers ◽  
Liquidity Provision ◽  
Trading Behaviour

scholarly journals Os efeitos da introdução de agentes de liquidez no mercado acionário brasileiro

2013 ◽  
Vol 11 (2) ◽  
pp. 281
Author(s):  
Marcelo Perlin
Keyword(s):  
Event Study ◽  
High Frequency ◽  
Financial Institution ◽  
Stock Exchange ◽  
Market Maker ◽  
Average Increase ◽  
Market Making ◽  
Market Makers ◽  
Liquidity Provision ◽  
Before And After

The main objective of this study is to analyze the empirical effects of the introduction of market makers in the Brazilian stock exchange. By aggregating information regarding the dates of the market maker’s contract and the use of a privileged high frequency database, it was possible to execute an event study to check the effect of the introduction of liquidity agents. As expected, the period after the beginning of the market maker’s contract presented a significant increase in the liquidity of the stocks. The study reports an average increase of 31% in the number of trades in the period before and after the start of the contract. Another result is that the work of a liquidity agent can change significantly the autocorrelation of the trade signs in approximately 10%. Such a result is stronger for the stocks with lower liquidity. The investigation also shows heterogeneous results for the performance of the liquidity provision when the analysis based itself on the financial institution of the market maker. Such information is particularly important for companies that are seeking to contract market making services.

scholarly journals High-frequency trading and networked markets

2021 ◽  
Vol 118 (26) ◽  
pp. e2015573118
Author(s):  
Federico Musciotto ◽  
Jyrki Piilo ◽  
Rosario N. Mantegna
Keyword(s):  
Financial Markets ◽  
High Frequency ◽  
Market Liquidity ◽  
High Frequency Trading ◽  
Complex Network Theory ◽  
Market Participants ◽  
Liquidity Provision ◽  
Regulatory Constraints ◽  
Great Heterogeneity ◽  
Trading Decisions

Financial markets have undergone a deep reorganization during the last 20 y. A mixture of technological innovation and regulatory constraints has promoted the diffusion of market fragmentation and high-frequency trading. The new stock market has changed the traditional ecology of market participants and market professionals, and financial markets have evolved into complex sociotechnical institutions characterized by a great heterogeneity in the time scales of market members’ interactions that cover more than eight orders of magnitude. We analyze three different datasets for two highly studied market venues recorded in 2004 to 2006, 2010 to 2011, and 2018. Using methods of complex network theory, we show that transactions between specific couples of market members are systematically and persistently overexpressed or underexpressed. Contemporary stock markets are therefore networked markets where liquidity provision of market members has statistically detectable preferences or avoidances with respect to some market members over time with a degree of persistence that can cover several months. We show a sizable increase in both the number and persistence of networked relationships between market members in most recent years and how technological and regulatory innovations affect the networked nature of the markets. Our study also shows that the portfolio of strategic trading decisions of high-frequency traders has evolved over the years, adding to the liquidity provision other market activities that consume market liquidity.

High Frequency Trading of Commodities

2018 ◽  
Author(s):  
Raymond P. H. Fishe
Keyword(s):  
High Frequency ◽  
Equity Markets ◽  
Conclusive Evidence ◽  
Commodity Markets ◽  
High Frequency Trading ◽  
Market Quality ◽  
Market Makers ◽  
Speed Advantage ◽  
Open Outcry ◽  
Derivative Markets

Electronic platforms and high frequency traders (HFTs) have changed the nature of trading. Like equity markets, commodity markets have experienced an influx of algorithmic traders and a decline in “pit” or open outcry trading. Regulatory efforts to understand the effects of HFTs and to offer prudent guidelines or new rules are in their infancy. An overall hesitancy exists because academic studies have produced diverse results on liquidity, volatility, and market quality. This survey focuses on high frequency trading research in commodity derivative markets, documenting basic results and extracting inferences when warranted. Evidence indicates that HFTs act as market makers and their speed advantage has lowered transaction costs, generally during normal markets. Although not entirely conclusive, evidence also suggests that HFTs may exacerbate volatility by withdrawing liquidity in times of market stress, such as during “flash” crashes.

scholarly journals High-Frequency Trading Competition

2018 ◽  
Vol 54 (4) ◽  
pp. 1469-1497 ◽  
Author(s):  
Jonathan Brogaard ◽  
Corey Garriott
Keyword(s):  
High Frequency ◽  
Stock Exchange ◽  
Market Liquidity ◽  
High Frequency Trading ◽  
Toronto Stock Exchange ◽  
Bid Ask Spreads

Theory on high-frequency traders (HFTs) predicts that market liquidity for a security decreases in the number of HFTs trading the security. We test this prediction by studying a new Canadian stock exchange, Alpha, that experienced the entry of 11 HFTs over 4 years. We find that bid–ask spreads on Alpha converge to those at the Toronto Stock Exchange as more HFTs trade on Alpha. Effective and realized spreads for non-HFTs improve as HFTs enter the market. To explain the contrast with theory, which models the HFT as a price competitor, we provide evidence more consistent with HFTs fitting a quantity-competitor framework.

LIQUIDITY PROVISION IN CAPACITY-CONSTRAINED MARKETS

2011 ◽  
Vol 15 (S1) ◽  
pp. 119-144 ◽  
Author(s):  
Pierre-Olivier Weill
Keyword(s):  
Financial Market ◽  
Asset Allocation ◽  
Capacity Constraint ◽  
Market Makers ◽  
Liquidity Provision ◽  
Bid Ask Spread ◽  
Time Variations ◽  
Capacity Constrained ◽  
Constrained Markets ◽  
Over Time

We study a competitive dynamic financial market subject to a transient selling pressure when market makers face a capacity constraint on their number of trades per unit of time with outside investors. We show that profit-maximizing market makers provide liquidity in order to manage their trading capacity constraint optimally over time: they use slack trading capacity early to accumulate assets when the selling pressure is strong in order to relax their trading capacity constraint and sell to buyers more quickly when the selling pressure subsides. When the trading capacity constraint binds, the bid–ask spread is strictly positive, widening and narrowing as market makers build up and unwind their inventories. Because the equilibrium asset allocation is constrained Pareto-optimal, the time variations in bid–ask spread are not a symptom of inefficient liquidity provision.

scholarly journals Optimal inventory management and order book modeling

2019 ◽  
Vol 65 ◽  
pp. 145-181 ◽  
Author(s):  
Nicolas Baradel ◽  
Bruno Bouchard ◽  
David Evangelista ◽  
Othmane Mounjid
Keyword(s):  
Inventory Management ◽  
High Frequency ◽  
Limit Order Book ◽  
Order Book ◽  
Value Functions ◽  
Limit Order ◽  
Terminal Wealth ◽  
Market Makers ◽  
Market Participants ◽  
The One

We model the behavior of three agent classes acting dynamically in a limit order book of a financial asset. Namely, we consider market makers (MM), high-frequency trading (HFT) firms, and institutional brokers (IB). Given a prior dynamic of the order book, similar to the one considered in the Queue-Reactive models [12, 18, 19], the MM and the HFT define their trading strategy by optimizing the expected utility of terminal wealth, while the IB has a prescheduled task to sell or buy many shares of the considered asset. We derive the variational partial differential equations that characterize the value functions of the MM and HFT and explain how almost optimal control can be deduced from them. We then provide a first illustration of the interactions that can take place between these different market participants by simulating the dynamic of an order book in which each of them plays his own (optimal) strategy.

scholarly journals MARKET MAKING WITH ALPHA SIGNALS

2020 ◽  
Vol 23 (03) ◽  
pp. 2050016
Author(s):  
ÁLVARO CARTEA ◽  
YIXUAN WANG
Keyword(s):  
High Frequency ◽  
High Frequency Data ◽  
Model Parameters ◽  
Market Maker ◽  
Electronic Market ◽  
Market Making ◽  
Liquidity Provision ◽  
Limit Orders ◽  
Adverse Selection Costs ◽  
Downward Pressure

We show how a market maker employs information about the momentum in the price of the asset (i.e. alpha signal) to make decisions in their liquidity provision strategy in an order-driven electronic market. The momentum in the midprice of the asset depends on the execution of liquidity taking orders and the arrival of news. Buy market orders (MOs) exert a short-lived upward pressure on the midprice, whereas sell MOs exert a short-lived downward pressure on the midprice. We employ Nasdaq high-frequency data to estimate model parameters and to illustrate the performance of the market making strategy. The market maker employs the alpha signal to minimise adverse selection costs, execute directional trades in anticipation of price changes, and to manage inventory risk. As the market maker increases their tolerance to inventory risk, the expected profits that stem from the alpha signal increase because the strategy employs more speculative MOs and performs more roundtrip trades with limit orders.

Sign in / Sign up

Export Citation Format

Share Document