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Journal of Financial Economics Vol. 159 2024

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

Mahendrarajah Nimalendran1; Khaladdin Rzayev2,3,4,5; Satchit Sagade6,7

1 University of Florida · 2 Koç University · 3 Systemic Risk Centre · 4 London School of Economics and Political Science · 5 University of Edinburgh · 6 Nasdaq (United States) · 7 Leibniz Institute for Financial Research SAFE

open access

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.

DOI
10.1016/j.jfineco.2024.103900
Volume
159
Pages
103900
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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