Abstract

We examine how market makers with high-frequency trading (HFT-MMs) react to asymmetric information and how they influence market liquidity. We propose the market microstructure model consisting of heterogeneous-speed market makers and liquidity traders who bring private information. In the equilibrium, the liquidity does not have monotonicity with respect to the information precision. Moreover, the HFT-MM contributes to the increase of market liquidity by reflecting the private information of liquidity consumers into the market; however, if the precision of the private information is not stable during the different periods, the market liquidity deteriorates because the HFT-MM avoids the inventory risk. This liquidity deterioration is worse when the population ratio of the HFT-MM is larger. This is a joint work with Katsumasa Nishide (Hitotsubashi University).