Liquidity provider incentives in fragmented securities markets

Abstract

We study the introduction of single-market liquidity provider incentives in fragmented securities markets. Specifically, we investigate whether fee rebates for liquidity providers enhance liquidity on the introducing market and thereby increase its competitiveness and market share. Further, we analyze whether single-market liquidity provider incentives increase overall market liquidity available for market participants. Therefore, we measure the specific liquidity contribution of individual markets to the aggregate liquidity in the fragmented market environment. While liquidity and market share of the venue introducing incentives increase, we find no significant effect for turnover and liquidity of the whole market.

Untitled

“…This aligns with earlier research by Huber et al (2012), which highlighted that HFT firms act as market makers, contributing to tighter bid-ask spreads and lower transaction costs. This review substantiates these claims with recent data, illustrating that HFT remains pivotal in maintaining efficient market operations (Clapham et al, 2021). The continuous placement of buy and sell orders by HFT firms ensures market liquidity, making it easier for other market participants to execute trades.…”

“…New algorithms and the integration of artificial intelligence and machine learning into trading strategies hold the promise of further enhancing the efficiency and profitability of HFT. Earlier studies noted the potential for these technologies but lacked detailed analysis due to their nascent state (Clapham et al, 2021). This review provides an updated perspective, highlighting how these technologies enable the development of more adaptive and sophisticated trading models capable of responding to market conditions in real time.…”

The Impact of High-Frequency Trading on Modern Securities Markets

“…The DiD-methodology allows a clear analysis of the effect of a treatment (here the exogenous and unanticipated interruption of HFT on Xetra) since it cancels out potential confounding effects such as trends in the treatment group over the observation period and permanent differences between both groups (Imbens and Wooldridge 2009). Moreover, this methodology is commonly used to assess the impact of new regulations, market design variations, or changes in trading technology on the quality of securities markets (e.g., Gomber et al 2016b;Clapham et al 2021;Hendershott et al 2011). Yet, the referenced studies apply the DiD-approach to analyses based on daily data whereas this study is based on intraday data.…”

“…Because stocks from different European or even non-European markets do not fulfill these requirements or are not as comparable to DAX30 stocks as the stocks of the French CAC40 index, they do not qualify for the control group. The use of DAX30 and CAC40 stocks as treatment and control group in a DiDsetup has also been applied in other empirical studies and has been proven to work well (e.g., Gomber et al 2016b;Clapham et al 2021).…”

Order Routing Decisions for a Fragmented Market: A Review

“…Many empirical studies have tested the effect of the fee schedule on trading activities (Clapham et al 2021;Comerton-Forde et al 2018). For example, Cardella et al (2017) suggest that although the take fee and make fee both reduce trading activities, the magnitudes in reduction are different.…”