High Frequency Trading and The New-Market Makers

A.J. Menkveld

doi:10.1016/j.finmar.2013.06.006

High Frequency Trading and The New-Market Makers

A.J. Menkveld

Finance

Research output: Contribution to Journal › Article › Academic › peer-review

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. © 2013 Elsevier B.V.

Original language	English
Pages (from-to)	712-740
Journal	Journal of Financial Markets
Volume	16
Issue number	4
DOIs	https://doi.org/10.1016/j.finmar.2013.06.006
Publication status	Published - 2013

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AB - 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. © 2013 Elsevier B.V.

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