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

Mahendrarajah Nimalendran, Khaladdin Rzayev, Satchit Sagade

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

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.
Original languageEnglish
Article number103900
Pages (from-to)1-15
Number of pages15
JournalJournal of Financial Economics
Volume159
Early online date3 Jul 2024
DOIs
Publication statusE-pub ahead of print - 3 Jul 2024

Keywords / Materials (for Non-textual outputs)

  • high-frequency trading
  • options liquidity
  • hedging
  • latency arbitrage
  • informed trading

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