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Liquidity Provider Incentives in Fragmented Securities Markets

34 Pages Posted: 19 May 2017  

Benjamin Clapham

Goethe University Frankfurt Faculty of Economics and Business Administration

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration

Jens Lausen

Goethe University Frankfurt - Faculty of Economics and Business Administration

Sven Panz

Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: May 18, 2017

Abstract

We study the introduction of single-market liquidity provider incentives in fragmented securities markets. Specifically, we analyze the Xetra Liquidity Provider Program at Deutsche Boerse from two perspectives: First, we investigate whether fee-rebates for liquidity providers enhance liquidity on the specific venue thereby increasing its competitiveness and market share. Second, we analyze whether single-market liquidity provider incentives increase overall market liquidity available for market participants in a fragmented market. For this purpose, we consolidate high-frequency order book information of the most relevant lit venues and measure the specific liquidity contribution of individual markets to the aggregate liquidity in the fragmented market environment. Our empirical results show that single-market liquidity provider incentives in fragmented markets result in increased liquidity on the respective market, 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 turnover and liquidity of 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

Clapham, Benjamin and Gomber, Peter and Lausen, Jens and Panz, Sven, Liquidity Provider Incentives in Fragmented Securities Markets (May 18, 2017). Available at SSRN: https://ssrn.com/abstract=2970452 or http://dx.doi.org/10.2139/ssrn.2970452

Benjamin Clapham (Contact Author)

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.efinancelab.de/no_cache/team/?user_wiwipubs_pi2[showUid]=478

Jens Lausen

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, D-60323
Germany

Sven Panz

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, D-60325
Germany

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