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Liquidity provider incentives in fragmented securities markets

Author

Listed:
  • Clapham, Benjamin
  • Gomber, Peter
  • Lausen, Jens
  • Panz, Sven

Abstract

We test theoretical predictions of changes in make/take fees in a setting with isolated make rebates for liquidity providers on a single trading venue (Xetra) by examining the impact on both Xetra and the overall market. The rebates lead to higher quoted depth but do not change bid–ask spreads or trading volume on Xetra. For the overall market, no change in trading volume or liquidity is observable. This shows that market participants redistribute their orders to the venue offering fee rebates rather than providing additional liquidity to the overall market. Consequently, the impact of fee changes depends on the setting.

Suggested Citation

  • Clapham, Benjamin & Gomber, Peter & Lausen, Jens & Panz, Sven, 2021. "Liquidity provider incentives in fragmented securities markets," Journal of Empirical Finance, Elsevier, vol. 60(C), pages 16-38.
    • Handle: RePEc:eee:empfin:v:60:y:2021:i:c:p:16-38
    DOI: 10.1016/j.jempfin.2020.11.002
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    Cited by:

    1. Arman Abgaryan & Utkarsh Sharma & Joshua Tobkin, 2024. "Proof of Efficient Liquidity: A Staking Mechanism for Capital Efficient Liquidity," Papers 2401.04521, arXiv.org, revised Feb 2024.
    2. Petar-Pierre Matek & Maša Galiæ, 2024. "The impact of designated market-makers on liquidity in frontier markets: Evidence from Zagreb and Ljubljana Stock Exchanges," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 42(1), pages 95-121.
    3. Suchismita Mishra & Le Zhao, 2021. "Order Routing Decisions for a Fragmented Market: A Review," JRFM, MDPI, vol. 14(11), pages 1-32, November.
    4. Lausen, Jens & Clapham, Benjamin & Gomber, Peter & Bender, Micha, 2022. "Drivers and effects of stock market fragmentation - Insights on SME stocks," SAFE Working Paper Series 367, Leibniz Institute for Financial Research SAFE.
    5. Benjamin Clapham & Martin Haferkorn & Kai Zimmermann, 2023. "The Impact of High-Frequency Trading on Modern Securities Markets," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 65(1), pages 7-24, February.
    6. K.C., Bevin & Verma, Ashu, 2023. "Decentralized local electricity market model using Automated Market Maker," Applied Energy, Elsevier, vol. 334(C).

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    More about this item

    Keywords

    Liquidity; Trading volume; Market fragmentation; Liquidity provider incentives; Exchange fees;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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