Automated Liquidity Provision

Traditional market makers are losing their importance as automated systems have largely assumed the role of liquidity provision in markets. We update the model of Glosten and Milgrom (1985) to analyze this new world: we add multiple securities and introduce an automated market maker who prices order ow for all securities contemporaneously. This automated participant transacts the majority of orders, sets prices that are more ecient, reduces spreads, and increases informed and decreases uninformed traders' transaction costs. The model's predictions match very well with recent empirical ndings and are dicult to replicate with alternative models.