Liquidity Provider Incentives in Fragmented Securities Markets
48 Pages Posted: 19 May 2017 Last revised: 24 May 2019
Date Written: May 22, 2019
We study the introduction of single-market liquidity provider incentives in fragmented securities markets. Specifically, we analyze the introduction of the Xetra Liquidity Provider Program at Deutsche Boerse from two perspectives: First, we investigate whether fee-rebates for liquidity providers enhance liquidity on the trading venue thereby increasing its competitiveness and market share. Second, we analyze whether single-market liquidity provider incentives increase aggregate liquidity available in fragmented markets or whether they lead to a redistribution of liquidity among trading venues. Our results show that single-market liquidity provider incentives result in increased liquidity on the market introducing the rebates, a higher contribution of that market to consolidated liquidity, and gains in market share in terms of trading volume. However, we find no significant effect for trading volume and liquidity in the fragmented market as a whole but a redistribution to the venue offering the incentives.
Keywords: Liquidity, Trading Volume, Market Fragmentation, Liquidity Provider Incentives, Transaction Costs
JEL Classification: G10, G14
Suggested Citation: Suggested Citation