Liquidity cycles and make/take fees in electronic markets

Thierry Foucault, Ohad Kadan () and Eugene Kandel

No 920, HEC Research Papers Series from HEC Paris

Abstract: In this paper, the authors develop a dynamic model of trading with two specialized sides: traders posting quotes (“market makers”) and traders hitting quotes (“market takers”). Traders monitor the market to seize profit opportunities, generating high frequency make/take liquidity cycles. Monitoring decisions by market-makers and market-takers are self-reinforcing, generating multiple equilibria with differing liquidity levels and duration clustering. The trading rate is typically maximized when makers and takers are charged different fees or even paid rebates, as observed in reality. The model yields several empirical implications regarding the determinants of make/take fees, the trading rate, the bid-ask spread, and the effect of algorithmic trading on these variables. Finally, algorithmic trading can improve welfare because it increases the rate at which gains from trade are realized.

Keywords: liquidity; monitoring; make/take fees; duration clustering; algorithmic trading; two-sided markets (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2009-10-01
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (3)

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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 (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)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0920

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