Traditional market makers are losing their importance as automated systemshave largely assumed the role of liquidity provision in markets. We update themodel of Glosten and Milgrom (1985) to analyze this new world: we add multiplesecurities and introduce an automated market maker who uses the relationshipsbetween securities to price order flow. This new automated participanttransacts the majority of orders, sets prices that are more efficient, andincreases informed and decreases uninformed traders' transaction costs. Theseresults can explain the recent dominance of high frequency trading in USmarkets and the corresponding increase in trading volume and decrease intransaction costs for US stocks.
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