Automated liquidity provision

Gerig, A; Michayluk, D

Automated liquidity provision

Gerig, A Michayluk, D

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Publication Type:: Journal Article
Citation:: Pacific Basin Finance Journal, 2017, 45 pp. 1 - 13
Issue Date:: 2017-10-01

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Field	Value	Language
dc.contributor.author	Gerig, A	en_US
dc.contributor.author	Michayluk, D https://orcid.org/0000-0001-9020-0855	en_US
dc.date.issued	2017-10-01	en_US
dc.identifier.citation	Pacific Basin Finance Journal, 2017, 45 pp. 1 - 13	en_US
dc.identifier.issn	0927-538X	en_US
dc.identifier.uri	http://hdl.handle.net/10453/115189
dc.description.abstract	© 2016 Over the last decade, the task of liquidity provision in many markets has shifted from traditional market makers to autonomous, computerized trading systems. These automated systems collect, process, and react to market-wide information quicker and more comprehensively than the humans they have replaced. Here, we update the model of Glosten and Milgrom (1985) to analyze how the automation of liquidity provision affects market quality, the transaction costs of market participants, and volatility. To Glosten and Milgrom's original model, we add multiple securities and introduce an automated market maker who prices order flow for all securities contemporaneously. We find that the automated market maker transacts the majority of orders, sets prices that are more efficient, increases informed and decreases uninformed traders' transaction costs, and has no effect on volatility. The model's predictions match very well with recent empirical findings and are difficult to replicate with alternative models.	en_US
dc.relation.ispartof	Pacific Basin Finance Journal	en_US
dc.relation.isbasedon	10.1016/j.pacfin.2016.05.006	en_US
dc.subject.classification	Finance	en_US
dc.title	Automated liquidity provision	en_US
dc.type	Journal Article
utslib.citation.volume	45	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	1501 Accounting, Auditing and Accountability	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	closed_access
pubs.publication-status	Published	en_US
pubs.volume	45	en_US

Abstract:

© 2016 Over the last decade, the task of liquidity provision in many markets has shifted from traditional market makers to autonomous, computerized trading systems. These automated systems collect, process, and react to market-wide information quicker and more comprehensively than the humans they have replaced. Here, we update the model of Glosten and Milgrom (1985) to analyze how the automation of liquidity provision affects market quality, the transaction costs of market participants, and volatility. To Glosten and Milgrom's original model, we add multiple securities and introduce an automated market maker who prices order flow for all securities contemporaneously. We find that the automated market maker transacts the majority of orders, sets prices that are more efficient, increases informed and decreases uninformed traders' transaction costs, and has no effect on volatility. The model's predictions match very well with recent empirical findings and are difficult to replicate with alternative models.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/115189