The Provision of Liquidity by High‐Frequency Participants

Abstract This paper examines the order submission strategies and supply of liquidity by high‐frequency participants versus the remainder of participants in the limit order book. The results show that high‐frequency participants submit orders at multiple prices in the limit order book, concentrated at or within the quote. This activity translates into the provision of liquidity on an on‐going basis, which is robust to fast versus slow and volatile markets, together suggesting that high‐frequency participants resolve temporal liquidity imbalances in the limit order book. The evidence is consistent with high‐frequency trading (HFT) improving market liquidity, but there remain issues surrounding high‐frequency participants’ effect on market depth and the difficulty of trading of non‐HFT participants.