Abstract
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.
| Original language | English |
|---|---|
| Pages (from-to) | 220-249 |
| Number of pages | 30 |
| Journal | Journal of Financial Economics |
| Volume | 140 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - Apr 2021 |
Bibliographical note
Funding Information:We would like to thank Shmuel Baruch, Jean-Edouard Colliard, Sugato Chakravarty, Hans Degryse, Jérôme Dugast, Frank de Jong, Thierry Foucault, Nicolae Gârleanu, Jasmin Gider, Terry Hendershott, Johan Hombert, Andrei Kirilenko, Pete Kyle, Katya Malinova, Albert Menkveld, Sophie Moinas, Christine Parlour, Ioanid Roşu, Mathijs van Dijk, Wolf Wagner, Jing Zhao, conference participants at the 2016 AFA Meeting (San Francisco), the 2016 Paris Dauphine Market Microstructure Conference, the 2015 Conference on the Industrial Organization of Securities Markets (Frankfurt), the 2015 CIFR Symposium Celebrating the 30 Years Since Kyle Met Glosten & Milgrom (Sydney), the 2014 FIRS Conference (Quebec), the 2014 EFA Conference (Lugano), TSE High-Frequency Trading Conference 2013 (Paris), and seminar participants at ESMA, SEC, CFTC, HEC Paris, and Erasmus University Rotterdam for helpful comments and suggestions. This paper was awarded with the 2015 De la Vega prize granted by the Federation of European Securities Exchanges. Mark Van Achter gratefully acknowledges financial support from Trustfonds Erasmus University Rotterdam.
Funding Information:
We would like to thank Shmuel Baruch, Jean-Edouard Colliard, Sugato Chakravarty, Hans Degryse, J?r?me Dugast, Frank de Jong, Thierry Foucault, Nicolae G?rleanu, Jasmin Gider, Terry Hendershott, Johan Hombert, Andrei Kirilenko, Pete Kyle, Katya Malinova, Albert Menkveld, Sophie Moinas, Christine Parlour, Ioanid Ro?u, Mathijs van Dijk, Wolf Wagner, Jing Zhao, conference participants at the 2016 AFA Meeting (San Francisco), the 2016 Paris Dauphine Market Microstructure Conference, the 2015 Conference on the Industrial Organization of Securities Markets (Frankfurt), the 2015 CIFR Symposium Celebrating the 30 Years Since Kyle Met Glosten & Milgrom (Sydney), the 2014 FIRS Conference (Quebec), the 2014 EFA Conference (Lugano), TSE High-Frequency Trading Conference 2013 (Paris), and seminar participants at ESMA, SEC, CFTC, HEC Paris, and Erasmus University Rotterdam for helpful comments and suggestions. This paper was awarded with the 2015 De la Vega prize granted by the Federation of European Securities Exchanges. Mark Van Achter gratefully acknowledges financial support from Trustfonds Erasmus University Rotterdam.
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© 2020