The 'Make or Take' Decision in an Electronic Market: Evidence on the Evolution of Liquidity

56 Pages Posted: 23 Oct 2002

See all articles by Robert J. Bloomfield

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: September 2003

Abstract

This paper uses experimental asset markets to investigate the evolution of liquidity in an electronic limit order market. Our market setting includes salient features of electronic limit order markets, as well as informed traders and liquidity traders. We focus on the strategies of the traders, and how these are affected by trader type, characteristics of the market, and characteristics of the asset. We find that informed traders use more limit orders than do liquidity traders. Our main result is that liquidity provision shifts as trading progresses, with informed traders increasingly providing liquidity in markets. The change in the behavior of the informed traders seems to be in response to the dynamic adjustment of prices to information; they take (provide) liquidity when the value of their information is high (low). Thus, a market-making role emerges endogenously in our electronic markets and is ultimately adopted by the traders who are least subject to adverse selection when placing limit orders.

Keywords: Market microstructure, experimental economics, experiments, electronic markets, limit order book, liquidity, continuous auctions, limit orders, trading strategies, informed traders, information asymmetry

JEL Classification: G10, D44, D82, C90

Suggested Citation

Bloomfield, Robert J. and O'Hara, Maureen and Saar, Gideon, The 'Make or Take' Decision in an Electronic Market: Evidence on the Evolution of Liquidity (September 2003). 13th Annual Utah Winter Finance Conference; NYU Stern School of Business Working Paper No. FIN-02-029; AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=336683 or http://dx.doi.org/10.2139/ssrn.336683

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

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