Liquidity Cycles and Make/Take Fees in Electronic Markets
Preprint
- 14 March 2012
- preprint
- Published by Elsevier in SSRN Electronic Journal
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.Keywords
This publication has 36 references indexed in Scilit:
- Low-Latency TradingSSRN Electronic Journal, 2011
- Trading Fees and Efficiency in Limit Order MarketsSSRN Electronic Journal, 2011
- Algorithmic Trading and InformationSSRN Electronic Journal, 2011
- Presidential Address: Asset Price Dynamics with Slow‐Moving CapitalThe Journal of Finance, 2010
- Competition for Order Flow and Smart Order Routing SystemsThe Journal of Finance, 2008
- Autoregressive Conditional Duration (ACD) Models in Finance: A Survey of the Theoretical and Empirical LiteratureSSRN Electronic Journal, 2006
- Over-the-Counter MarketsEconometrica, 2005
- Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order MarketThe Review of Financial Studies, 2001
- An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris BourseThe Journal of Finance, 1995
- Time and the Process of Security Price AdjustmentThe Journal of Finance, 1992