High-frequency traders’ single-dealer platforms and market quality

High-frequency traders (HFTs) mainly operate on public exchanges. Since the European regulatory changes in 2018 (Markets in Financial Instruments Directive II), some HFTs began operating Systematic Internalizers (SIs), i.e., single-dealer platforms where clients trade against the dealer's inventory. Using Swedish equity market data, we show that higher HFT dealer-platform activity reduces displayed exchange liquidity: quoted spreads widen and depth falls. Effective spreads are largely unchanged for HFTs but increase for non-HFT traders. Price efficiency improves as return autocorrelations and excess variance ratios move closer to random-walk benchmarks. Evidence suggests HFT dealers' inventory management is the main channel behind these results.