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In this article, we present a discrete time modeling framework, in which theshape and dynamics of a Limit Order Book (LOB) arise endogenously from anequilibrium between multiple market participants (agents). We use the proposedmodeling framework to analyze the effects of trading frequency on marketliquidity in a very general setting. In particular, we demonstrate the dualeffect of high trading frequency. On the one hand, the higher frequencyincreases market efficiency, if the agents choose to provide liquidity inequilibrium. On the other hand, it also makes markets more fragile, in thesense that the agents choose to provide liquidity in equilibrium only if theyare market-neutral (i.e., their beliefs satisfy certain martingale property).Even a very small deviation from market-neutrality may cause the agents to stopproviding liquidity, if the trading frequency is sufficiently high, whichrepresents an endogenous liquidity crisis (aka flash crash) in the market. Thisframework enables us to provide more insight into how such a liquidity crisisunfolds, connecting it to the so-called adverse selection effect.

Liquidity Effects of Trading Frequency