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Liquidity Cycles and Make/Take Fees in Electronic Markets

Journal of Finance, Fforthcoming

EFA 2009 Bergen Meetings Paper

71 Pages Posted: 16 Feb 2009 Last revised: 15 Mar 2012

See all articles by Thierry Foucault

Thierry Foucault

HEC Paris - Finance Department

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2012

Abstract

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.

Keywords: Make/Take Fees, Duration Clustering, Liquidity Externalities, Algorithmic trading, Two-Sided Markets

JEL Classification: D4, G1, G20, L1

Suggested Citation

Foucault, Thierry and Kadan, Ohad and Kandel, Eugene, Liquidity Cycles and Make/Take Fees in Electronic Markets (March 14, 2012). Journal of Finance, Fforthcoming, EFA 2009 Bergen Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1342799 or http://dx.doi.org/10.2139/ssrn.1342799

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Ohad Kadan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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