The Effects of High Frequency Trading in a Multi-Asset Model

High frequency traders have largely replaced human liquidity providers in US equity markets. This has increased market efficiency, reduced transaction costs, and increased volumes. We develop a model that can explain how and why this has occurred: -Similar to the Glosten and Milgrom (1985) model, but with multiple securities. -We add an automated market maker who trades across securities and understands the relationships between their end-of-period values. -This new participant: 1. Transacts the majority of orders. 2. Makes prices more efficient. 3. Increases informed and decreases uninformed traders transaction costs. -As a result: 1. Volumes increase. 2. Overall transaction costs are reduce