Who Provides Liquidity and When?

54 Pages Posted: 21 Jan 2017 Last revised: 8 Jun 2020

See all articles by Sida Li

Sida Li

Brandeis University

Xin Wang

Nanyang Technological University (NTU) - Division of Banking & Finance

Mao Ye

Cornell University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 26, 2020


We model competition for liquidity provision between high-frequency traders (HFTs) and slower execution algorithms (EAs) designed to minimize investors’ transaction costs. Under continuous pricing, EAs dominate liquidity provision by using aggressive limit orders to stimulate HFTs’ market orders. Under discrete pricing, HFTs dominate liquidity provision if the bid-ask spread is binding at one tick. If the tick size (minimum price variation) is not binding, EAs choose between stimulating HFTs and providing liquidity to non-HFTs. Transaction costs increase with the tick size but can be negatively correlated with the bid-ask spread when all traders can provide liquidity.

Keywords: Algorithmic trading, High-frequency trading, Liquidity, Tick Size

JEL Classification: G10, G20

Suggested Citation

Li, Sida and Wang, Xin and Ye, Mao, Who Provides Liquidity and When? (May 26, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2902984 or http://dx.doi.org/10.2139/ssrn.2902984

Sida Li

Brandeis University ( email )

Waltham, MA 02454
United States
2153509449 (Phone)

Xin Wang

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
+6593816646 (Phone)

HOME PAGE: http://https://www.financexinwang.com/

Mao Ye (Contact Author)

Cornell University ( email )

349 Sage Hall
114 E Ave
ITHACA, NY 148536201
United States
6072559509 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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