 Liquidity Cycles and Make/Take Fees in Electronic MarketsThierry Foucault, Ohad Kadan and Eugene Kandel Working Papers from HAL Abstract: We develop a model of trading in securities markets with two specialized sides: traders posting quotes ("market makers") and traders hitting quotes ("market takers"). Liquidity cycles emerge naturally, as the market moves from phases with high liquidity to phases with low liquidity. Traders monitor the market to seize profit opportunities. Complementarities in monitoring decisions generate multiplicity of equilibria: one with high liquidity and another with no liquidity. The trading rate depends on the allocation of the trading fee between each side and the maximal trading rate is typically achieved with asymmetric fees. The difference in the fee charged on market-makers and the fee charged on market-takers ("the make-take spread") increases in (i) the tick-size, (ii) the ratio of the size of the market-making side to the size of the market-taking side, and (iii) the ratio of monitoring costs for market-takers to monitoring costs for market-makers. The model yields several empirical implications regarding the trading rate, the duration between quotes and trades, the bid-ask spread, and the effect of algorithmic trading on these variables. Keywords: Make/Take Spread; Duration Clustering; Algorithmic trading; Two-Sided Markets (search for similar items in EconPapers) Published in 2009 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00489430 Access Statistics for this paper More papers in Working Papers from HAL |
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