Arbeitspapier

Identifying Cross-Sided Liquidity Externalities

We study the relevance of the cross-sided externality of liquidity between market makers and takers from the two-sided market perspective and test the empirical implications of the Foucault, Kadan, and Kandel (2012) model. We use exogenous changes in the make/take fee structure and a technological shock for liquidity takers, as experiments to identify cross-sided complementarities between liquidity makers and takers in the U.S. equity market. We find positive cross-sided externalities between liquidity providers and takers. Using the estimate of the externality from the instrumental variable regression, we find that the loss in revenue due to the increased subsidization of liquidity demanders from a fee change in a trading venue exceeds the increase in trading rate and revenue from the positive cross-sided liquidity externality. Our findings highlight the importance of accounting for participation externalities in the pricing strategy of trading venues. Our findings also shed light on the way the order-posting behavior of market makers and takers is interrelated and contribute to the on-going policy debate on the maker/taker practices in U.S. equity markets.

ISBN
978-82-7553-708-7
Sprache
Englisch

Erschienen in
Series: Working Paper ; No. 2012/20

Klassifikation
Wirtschaft
General Financial Markets: General (includes Measurement and Data)
Financial Institutions and Services: General
Information and Market Efficiency; Event Studies; Insider Trading
Thema
liquidity cycle
liquidity externality
two-sided markets
make/take fees

Ereignis
Geistige Schöpfung
(wer)
Skjeltorp, Johannes A.
Sojli, Elvira
Tham, Wing Wah
Ereignis
Veröffentlichung
(wer)
Norges Bank
(wo)
Oslo
(wann)
2012

Handle
Letzte Aktualisierung
10.03.2025, 11:45 MEZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • Skjeltorp, Johannes A.
  • Sojli, Elvira
  • Tham, Wing Wah
  • Norges Bank

Entstanden

  • 2012

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