Liquidity Cycles and Make/Take Fees in Electronic Markets
Journal of Finance, Fforthcoming
71 Pages Posted: 16 Feb 2009 Last revised: 15 Mar 2013
Date Written: March 14, 2012
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: Suggested Citation