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Liquidity Cycles and Make/Take Fees in Electronic Markets

Abstract : 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.
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Submitted on : Sunday, February 17, 2013 - 6:58:50 PM
Last modification on : Saturday, June 25, 2022 - 10:54:25 AM

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Thierry Foucault, Ohad Kadan, Eugene Kandel. Liquidity Cycles and Make/Take Fees in Electronic Markets. Journal of Finance, Wiley, 2013, 68 (1), pp.299-341. ⟨10.1111/j.1540-6261.2012.01801.x⟩. ⟨hal-00789263⟩



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