Liquidity with High-Frequency Market Making

We study a simple model of market making in which high-frequency market makers can cancel limit orders quickly after receiving an adverse signal. The resulting winner's curse induces low-frequency market makers to widen bid-ask spreads. Liquidity in the market may deteriorate unless high-frequency market makers fully replace low-frequency market makers in liquidity provision. Our result suggests that some restrictions on high-frequency trading, such as minimum resting times, may improve market liquidity by leveling the playing field among market makers with different speeds