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Liquidity Cycles and Make/Take Fees in Electronic Markets

  • THIERRY FOUCAULT
  • OHAD KADAN
  • EUGENE KANDEL

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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File URL: http://hdl.handle.net/10.1111/j.1540-6261.2012.01801.x
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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 68 (2013)
Issue (Month): 1 (02)
Pages: 299-341

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Handle: RePEc:bla:jfinan:v:68:y:2013:i:1:p:299-341
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