Who Provides Liquidity, and When?

Sida Li, Xin Wang and Mao Ye

No 25972, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We model competition for liquidity provision between high-frequency traders (HFTs) and slower execution algorithms designed to minimize transaction costs for buy-side institutions (B-Algos). Under continuous pricing, B-Algos dominate liquidity provision by using aggressive limit orders to stimulate HFTs’ market orders. Under discrete pricing, HFTs dominate liquidity provision if the bid–ask spread is binding at one tick. If the tick size is not binding, B-Algos choose between stimulating HFTs and providing liquidity to other non-HFTs. Flash crashes arise under certain parameter values. Transaction costs can be negatively correlated with the bid–ask spread when all traders can provide liquidity.

JEL-codes: G1 G12 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-mst and nep-ore
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Sida Li & Xin Wang & Mao Ye, 2021. "Who provides liquidity, and when?," Journal of Financial Economics, vol 141(3), pages 968-980.

Downloads: (external link)
http://www.nber.org/papers/w25972.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:25972

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w25972

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().