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Liquidity Cycles and Make/Take Fees in Electronic Markets
Author(s) -
FOUCAULT THIERRY,
KADAN OHAD,
KANDEL EUGENE
Publication year - 2013
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2012.01801.x
Subject(s) - market liquidity , externality , welfare , profit (economics) , liquidity crisis , economics , liquidity risk , monetary economics , market maker , business , microeconomics , financial economics , market economy , paleontology , horse , stock market , biology
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.