Liquidity Cycles and Make/Take Fees in Electronic Markets
By Thierry Foucault, Ohad Kadan, Eugene Kandel. 2013
198 citations recorded by the source corpus.
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.
Subfields: Finance, Management Science and Operations Research, Safety Research
View Paper: https://www.semanticscholar.org/paper/7dee46b5c0d30870b9f76ede85ffa67bf9b76193
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In Finance
In Management Science and Operations Research
Citations in the corpus
- High‐Frequency Trading and Market Performance (2020, unknown): “Other models that contain both aggressive and passive HFTs include Foucault, Kadan, and Kandel (2013), Jovanovic and Menkveld (2016), Foucault, Kozhan, and Tham (2017), Menkveld and Zoican (2017), and Budish, Cramton, and Shim (2015).”
- Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market: Rise of the Machines (2009, unknown): “33) for this F-statistic indicates that the maximal size of a nominal 5 percent test will be no greater than 10 (15) percent.”
- Can Brokers Have It All? On the Relation between Make-Take Fees and Limit Order Execution Quality: Can Brokers Have It All? (2016, background): “Foucault et al. (2013) examine whether it is the net fee or the relative levels of the make and take fees that matter.”