High-frequency trading in the stock market and the costs of options market making

Nimalendran, Mahendrarajah, Rzayev, Khaladdin and Sagade, Satchit (2024) High-frequency trading in the stock market and the costs of options market making. Journal of Financial Economics, 159. ISSN 0304-405X

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Abstract

We investigate how high-frequency trading (HFT) in equity markets affects options market liquidity. We find that increased aggressive HFT activity in the stock market leads to wider bid–ask spreads in the options market through two main channels. First, options market makers’ quotes are exposed to sniping risk from HFTs exploiting put–call parity violations. Second, informed trading in the options market further amplifies the impact of HFT in equity markets on the liquidity of options by simultaneously increasing the options bid–ask spread and intensifying aggressive HFT activity in the underlying market.

Item Type:	Article
Additional Information:	© 2024 The Author(s)
Divisions:	Systemic Risk Centre
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory H Social Sciences > HF Commerce > HF5601 Accounting
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	12 Jul 2024 11:51
Last Modified:	15 Jul 2024 11:36
URI:	http://eprints.lse.ac.uk/id/eprint/124228

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