  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 uses the relationships
between securities to price order flow. This new automated participant
transacts the majority of orders, sets prices that are more efficient, and
increases informed and decreases uninformed traders' transaction costs. These
results can explain the recent dominance of high frequency trading in US
markets and the corresponding increase in trading volume and decrease in
transaction costs for US stocks.
