Cross-Sided Liquidity Externalities

Management Science (Forthcoming)

Posted: 21 Mar 2012 Last revised: 7 Feb 2018

See all articles by Johannes Atle Skjeltorp

Johannes Atle Skjeltorp

Central Bank of Norway

Elvira Sojli

University of New South Wales (UNSW); UNSW Business School

Wing Wah Tham

University of New South Wales (UNSW)

Date Written: June 11, 2012

Abstract

The paper studies relevance of the cross-sided externality between liquidity makers and takers from the two-sided market perspective. We use exogenous changes in the make/take fee structure, minimum tick-size and technology for liquidity suppliers and demanders, as experiments to identify cross-sided complementarities between liquidity suppliers and demanders in the U.S. equity market. We find that the externality is on average positive, but it decreases with adverse selection. We quantify the economic significance of the externality by evaluating an exchange's revenue after a make/take fee change.

Keywords: Liquidity cycle, Liquidity externality, Two-sided markets, Make/take fees

JEL Classification: G10, G20, G14

Suggested Citation

Skjeltorp, Johannes Atle and Sojli, Elvira and Tham, Wing Wah, Cross-Sided Liquidity Externalities (June 11, 2012). Management Science (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2026593 or http://dx.doi.org/10.2139/ssrn.2026593

Johannes Atle Skjeltorp

Central Bank of Norway ( email )

P.O. Box 1179
Oslo, N-0107
Norway

HOME PAGE: http://www.norges-bank.no/research/skjeltorp/

Elvira Sojli

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

HOME PAGE: http://https://sites.google.com/site/esojli/

UNSW Business School ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://sites.google.com/site/esojli/

Wing Wah Tham (Contact Author)

University of New South Wales (UNSW)

Kensington
High St
Sydney, NSW 2052
Australia

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