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64. Competition in Liquidity Provision: Analysis of High Frequency Market Making and Policy Implications
Invited abstract in session MB-51: Market risk in a volatile world, stream Risk management in finance.
Monday, 10:30-12:00Room: M5 (building: 101)
Authors (first author is the speaker)
| 1. | Katsumasa Nishide
|
| Graduate School of Business and Finance, Waseda University | |
| 2. | Takaki Hayashi
|
| Keio University |
Abstract
We construct a financial market model wherein market makers post limit orders to compete for liquidity. We show that market makers may relinquish liquidity provision because of competition if the fundamental value of the asset is volatile. Besides the general perception that cancellation harms market liquidity, we find that cancellation can sustain liquidity and prevent depletion. Moreover, this finding, as well as others, leads to an important policy implication that the cancellation strategy, one of the most prominent characteristics of high-frequency trading, can positively affect market liquidity and should not be strictly regulated.
Keywords
- Finance and Banking
Status: accepted
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