Liquidity Cycles and Make/Take Fees in Electronic Markets

Thierry Foucault, Ohad Kadan and Eugene Kandel

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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: Liquidity Cycles; Make/Take Fees; Electronic Markets (search for similar items in EconPapers)
Date: 2013-02
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Citations: View citations in EconPapers (61)

Published in Journal of Finance, 2013, 68 (1), pp.299-341. ⟨10.1111/j.1540-6261.2012.01801.x⟩

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Related works:
Journal Article: Liquidity Cycles and Make/Take Fees in Electronic Markets (2013)
Working Paper: Liquidity cycles and make/take fees in electronic markets (2009)
Working Paper: Liquidity cycles and make/take fees in electronic markets (2009)
Working Paper: Liquidity Cycles and Make/Take Fees in Electronic Markets (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00789263

DOI: 10.1111/j.1540-6261.2012.01801.x

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