We model endogenous technology adoption and competition among liquidity providers with access to High-Frequency Trading (HFT) technology. HFT technology provides speed and informational advantages. Information advantages may restore excessively toxic markets. Speed technology may reduce resource costs for liquidity provision. Both effects increase liquidity and welfare. However, informationally advantaged HFTs may impose a winner’s curse on traditional market makers, who in response reduce their participation. This increases resource costs and lowers the execution likelihood for market orders, thereby reducing liquidity and welfare. This result also holds when HFT dominates traditional technology in terms of costs and informational advantages.

Additional Metadata
Keywords Adverse Selection, Liquidity, Latency, Informed Trading, Trading Technology.
JEL Financial Markets (jel D53), Financial Crises (jel G01), General Financial Markets: General (jel G10), Government Policy and Regulation (jel G18)
Persistent URL hdl.handle.net/1765/124392
Journal Journal of Financial Economics
Citation
Bongaerts, D.G.J, & van Achter, M.A. (2020). Competition among Liquidity Providers with Access to High-Frequency Technology. Journal of Financial Economics, Forthcomin. Retrieved from http://hdl.handle.net/1765/124392