High-Frequency Market Making to Large Institutional Trades

By Robert A. Korajczyk, Dermot Murphy. The Review of financial studies, 2018

145 citations recorded by the source corpus.

We study high-frequency trader (HFT) marker maker behavior in the presence of large trade packages. HFTs lose money on trading and make money from liquidity rebates. HFT liquidity provision is significantly reduced for large ``stressful'' trades with this reduction being more pronounced when an HFT assumes the designated market maker role. Over the life of a large trade, HFTs initially accommodate the order but switch to competing with the order. This is due to both inventory management and order anticipation. Average implementation shortfall for non-stressful (stressful) trades is 11 (35) basis points and is significantly affected by HFT liquidity provision.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/c224a17155fdb4372a1cfbb9c62d58e8a71b3244

Citations in the corpus

• Price Discovery without Trading: Evidence from Limit Orders (2019, unknown): “This could lead to excess intermediation if non-HFTs reduce their use of limit orders (Jovanovic and Menkveld (2015)).”
• High‐Frequency Trading around Large Institutional Orders (2019, unknown): “Korajczyk and Murphy (2014) study how HFTs trade around “large orders” for a Canadian sample.”
• High-Frequency Trading and Extreme Price Movements (2018, unknown): “Theory and empirical research suggests that ELPs may stop making markets during stressful periods when liquidity is most needed (Raman, Robe and Yadav, 2014; Anand and Venkataraman, 2015; Bongaerts and Van Achter, 2015; Cespa and Vives, 2015; Korajczyk and Murphy, 2015).”