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on Market Microstructure |
| By: | Foucault, Thierry; Kadan, Ohad; Kandel, Eugene |
| 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 |
| JEL: | G11 G12 |
| Date: | 2009–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0920&r=mst |
| By: | Skjeltorp, Johannes (Norges Bank); Ødegaard, Bernt Arne (University of Stavanger) |
| Abstract: | We investigate the information content of aggregate stock market liquidity and ask whether it may be a useful realtime indicator, both for financial stress, and real economic activity in Norway. We describe the development in a set of liquidity proxies at the Oslo Stock Exchange (OSE) for the period 1980-2008, with particular focus on crisis period 2007 through 2008, showing how market liquidity and trading activity changed for the whole market as well as for individual industry sectors. We also evaluate the predictive power of market liquidity for economic growth both in-sample and out-of-sample. |
| Keywords: | Liquidity; Business Cycles; Financial crisis; Economic Activity |
| JEL: | G10 G20 |
| Date: | 2009–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:stavef:2009_035&r=mst |