Cross-Sided Liquidity Externalities

Wing Wah Tham (), Elvira Sojli and Johannes Skjeltorp
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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

Management Science, 2018, vol. 64, issue 6, 2901-2929

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.

Keywords: liquidity cycle; liquidity externality; two-sided markets; make/take fees (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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