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Is selling more liquidity at a tighter spread that much more advantageous than participating in some amount x fewer trades with a looser spread? In other words
by usmannk 7y ago
Is selling more liquidity at a tighter spread that much more advantageous than participating in some amount x fewer trades with a looser spread?
In other words, I don't understand if or why it is the case that HFTs would like to, in general, offer tighter spreads than looser ones.
Edit: is it just that volume decreases super linearly in relation to the price of liquidity?
- evanpw 7y agoMarket makers sell liquidity, and the spread is the price they sell it at, so they'd prefer to sell at a higher price (larger spread). The reason that spreads tighten is competition: there are a few wholesale market makers, and the brokerages send more of their orders to the MM willing to guarantee the smallest spread. In fact, there's been something of a price war for the last few years, and retail spreads have come way down.