Who provides liquidity, and when?
We model competition for liquidity provision between high-frequency traders (HFTs) and slower execution algorithms (EAs) designed to minimize investors’ transaction costs. Under continuous pricing, EAs dominate liquidity provision by using aggressive limit orders to stimulate HFTs’ market orders. Un...
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sg-ntu-dr.10356-1597472023-05-19T07:31:16Z Who provides liquidity, and when? Li, Sida Wang, Xin Ye, Mao Nanyang Business School Business::Finance High-Frequency Trading Algorithmic Trading We model competition for liquidity provision between high-frequency traders (HFTs) and slower execution algorithms (EAs) designed to minimize investors’ transaction costs. Under continuous pricing, EAs dominate liquidity provision by using aggressive limit orders to stimulate HFTs’ market orders. Under discrete pricing, HFTs dominate liquidity provision if the bid-ask spread is binding at one tick. If the tick size (minimum price variation) is not binding, EAs choose between stimulating HFTs and providing liquidity to non-HFTs. Transaction costs increase with the tick size but can be negatively correlated with the bid-ask spread when all traders can provide liquidity. This research is supported by National Science Foundation grant 1,352,936 (jointly with the Office of Financial Research at the US Department of the Treasury) and National Science Foundation grant 1,838,183. 2022-06-30T07:52:54Z 2022-06-30T07:52:54Z 2021 Journal Article Li, S., Wang, X. & Ye, M. (2021). Who provides liquidity, and when?. Journal of Financial Economics, 141(3), 968-980. https://dx.doi.org/10.1016/j.jfineco.2021.04.020 0304-405X https://hdl.handle.net/10356/159747 10.1016/j.jfineco.2021.04.020 2-s2.0-85102246049 3 141 968 980 en Journal of Financial Economics © 2021 Elsevier B.V. All rights reserved. |
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Business::Finance High-Frequency Trading Algorithmic Trading |
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Business::Finance High-Frequency Trading Algorithmic Trading Li, Sida Wang, Xin Ye, Mao Who provides liquidity, and when? |
| description |
We model competition for liquidity provision between high-frequency traders (HFTs) and slower execution algorithms (EAs) designed to minimize investors’ transaction costs. Under continuous pricing, EAs dominate liquidity provision by using aggressive limit orders to stimulate HFTs’ market orders. Under discrete pricing, HFTs dominate liquidity provision if the bid-ask spread is binding at one tick. If the tick size (minimum price variation) is not binding, EAs choose between stimulating HFTs and providing liquidity to non-HFTs. Transaction costs increase with the tick size but can be negatively correlated with the bid-ask spread when all traders can provide liquidity. |
| author2 |
Nanyang Business School |
| author_facet |
Nanyang Business School Li, Sida Wang, Xin Ye, Mao |
| format |
Article |
| author |
Li, Sida Wang, Xin Ye, Mao |
| author_sort |
Li, Sida |
| title |
Who provides liquidity, and when? |
| title_short |
Who provides liquidity, and when? |
| title_full |
Who provides liquidity, and when? |
| title_fullStr |
Who provides liquidity, and when? |
| title_full_unstemmed |
Who provides liquidity, and when? |
| title_sort |
who provides liquidity, and when? |
| publishDate |
2022 |
| url |
https://hdl.handle.net/10356/159747 |
| _version_ |
1772827585683652608 |