Liquidity Cycles and Make/Take Fees in Electronic Markets
HEC Paris - Finance Department
Washington University in Saint Louis - John M. Olin Business School
Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)
March 14, 2012
Journal of Finance, Fforthcoming
EFA 2009 Bergen Meetings Paper
We develop a model in which the speed of reaction to trading opportunities is endogenous. Traders face a trade-off between the benefit of being first to seize a profit opportunity and the cost of attention required to be first to seize this opportunity. The model provides an explanation for maker/taker pricing, and has implications for the effects of algorithmic trading on liquidity, volume, and welfare. Liquidity suppliers' and liquidity demanders' trading intensities reinforce each other, highlighting a new form of liquidity externalities. Data on durations between trades and quotes could be used to identify these externalities.
Number of Pages in PDF File: 71
Keywords: Make/Take Fees, Duration Clustering, Liquidity Externalities, Algorithmic trading, Two-Sided Markets
JEL Classification: D4, G1, G20, L1Accepted Paper Series
Date posted: February 16, 2009 ; Last revised: March 15, 2013
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