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Liquidity Cycles and Make/Take Fees in Electronic Markets

Listed author(s):
  • Thierry Foucault

    ()

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • 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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Paper provided by HAL in its series Post-Print with number hal-00789263.

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Length:
Date of creation: Feb 2013
Publication status: Published in Journal of Finance, Wiley, 2013, 68 (1), pp.299-341. <10.1111/j.1540-6261.2012.01801.x>
Handle: RePEc:hal:journl:hal-00789263
DOI: 10.1111/j.1540-6261.2012.01801.x
Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00789263
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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