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The Effect of High-Frequency Market Making on Option Market Liquidity

Suchi Mishra, Robert T. Daigler and Richard Holowczak
The Journal of Trading Fall 2016, 11 (4) 56-76; DOI: https://doi.org/10.3905/jot.2016.11.4.056
Suchi Mishra
is a Knight Ridder research associate professor of finance in the Chapman Graduate School of Business at Florida International University in Miami, FL.
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  • For correspondence: mishras@fiu.edu
Robert T. Daigler
is a Knight Ridder research professor of finance in the Chapman Graduate School of Business at Florida International University in Miami, FL.
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  • For correspondence: daiglerr@fiu.edu
Richard Holowczak
is an associate professor of statistics and computer information systems at Baruch College of the City University of New York in New York, NY.
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  • For correspondence: richard.holowczak@baruch.cuny.edu
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Abstract

The transition from manual to electronic markets in options paved the way for pricing efficiencies and improved liquidity from options high-frequency market making (HFMM). We find that HFMM reduces option bid–ask spreads, although with differences across both option and firm characteristics. Depth increases with the number of market maker quote revisions, conflicting with extant high-frequency research in other markets. The largest absolute change for spreads (depth) is for mid-size (large) companies. However, the change to penny quotes for options caused HFMM to have less of an effect on both spreads and depth, showing that penny quoting exacerbates the pricing efficiency generated by more frequent quote revisions.

TOPICS: Exchanges/markets/clearinghouses, quantitative methods

  • © 2016 Institutional Investor, Inc.
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The Journal of Trading: 11 (4)
The Journal of Trading
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The Effect of High-Frequency Market Making on Option Market Liquidity
Suchi Mishra, Robert T. Daigler, Richard Holowczak
The Journal of Trading Sep 2016, 11 (4) 56-76; DOI: 10.3905/jot.2016.11.4.056

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The Effect of High-Frequency Market Making on Option Market Liquidity
Suchi Mishra, Robert T. Daigler, Richard Holowczak
The Journal of Trading Sep 2016, 11 (4) 56-76; DOI: 10.3905/jot.2016.11.4.056
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  • Article
    • Abstract
    • ELECTRONIC AND HIGH-FREQUENCY TRADING RESEARCH
    • DATA
    • LIQUIDITY MEASURES, METHODOLOGY, AND POTENTIAL LIQUIDITY CONSEQUENCES
    • RESULTS
    • CONCLUSIONS
    • ENDNOTES
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