Liquidity Provision in a High-Frequency World: An Empirical Approach


Very little research has been devoted to the trading strate- gies of HFTs. Here we focus on the market-making part of their trading activity. Based on the NASDAQ data, we can identify HFTs vs. non- HFT trading activity. The main idea is to show that at the beginning of the sample period (2000), there was a significant level of mean- reversion in prices, i.e. profit opportunities for HFTs. Using a simple Kalman filter, we show that HFTs tend to eploit this relationship. For later periods (2005 and 2010) the level of mean-reversion is significantly smaller, i.e. prices are closer to random walks. This is mainly due to competition between liqudity providers. 

Project Leader / Primary Investigator

Daniel Fricke with Austin Gerig

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