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Cross-Sided Liquidity Externalities

Author

Listed:
  • Wing Wah Tham

    (School of Banking and Finance, Australian Business School, University of New South Wales, Sydney, New South Wales 2052, Australia; Erasmus University Rotterdam, 3062 PA Rotterdam, Netherlands)

  • Elvira Sojli

    (School of Banking and Finance, Australian Business School, University of New South Wales, Sydney, New South Wales 2052, Australia; Erasmus University Rotterdam, 3062 PA Rotterdam, Netherlands)

  • Johannes A. Skjeltorp

    (Norges Bank, 0107 Oslo, Norway)

Abstract

We study the empirical relevance of the participation externality between liquidity suppliers (makers) and demanders (takers), i.e., whether liquidity demand attracts or reduces liquidity supply, and vice versa. We use exogenous shocks to exchange fees and technology as experiments to identify cross-sided complementarities between liquidity suppliers and demanders in the U.S. equity market. We find that the externality is large and positive, on average. However, the externality is negative in periods of high adverse selection. We quantify the economic significance of the externality by evaluating an exchange’s revenue after a fee change.

Suggested Citation

  • Wing Wah Tham & Elvira Sojli & Johannes A. Skjeltorp, 2018. "Cross-Sided Liquidity Externalities," Management Science, INFORMS, vol. 64(6), pages 2901-2929, June.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:6:p:2901-2929
    DOI: 10.287/mnsc.2016.2658
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