Optimal Make-Take Fees for Market Making Regulation

Euch, Omar El; Mastrolia, Thibaut; Rosenbaum, Mathieu; Touzi, Nizar

doi:10.2139/ssrn.3174933

Cited by 15 publications

(29 citation statements)

References 36 publications

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“…The second feature of our paper is that it is the first one to study the relative importance of the different aspects of contract design between DMMs and exchanges, distinguishing be-tween positive and negative incentives. While several studies exist on the role of maker/taker fees in encouraging liquidity provision (e.g., Colliard and Foucault (2012), Malinova and Park (2015), Clapham, Gomber, Lausen, and Panz (2017), Cardella, Hao, and Kalcheva (2017), Black (2018), El Euch, Mastrolia, Rosenbaum, andTouzi (2018), and Lin, Swan, and Harris (2018)), most of them focus on the case in which such fees are applied uniformly to all market participants, across all stocks rather than specifically to DMMs to incentivize their liquidity provision. In a closely-related recent paper on this issue, Bessembinder, Hao, and Zheng (2019) study the effect of both making/taking fees that are specific to DMMs and requirements of DMMs.…”

Section: Literature Reviewmentioning

confidence: 99%

Paying for Market Liquidity: Competition and Incentives

et al. 2019

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Section: Literature Reviewmentioning

confidence: 99%

Paying for Market Liquidity: Competition and Incentives

et al. 2019

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“…The recent work of [14] proposes a make-take fees design, combining the Avellaneda-Stoikov [3] model and a Principal-Agent framework with drift control, 2 to increase market liquidity on a single asset. In their formulation, the exchange offers a contract, resulting from a Stackelberg equilibrium between the market maker and the exchange, to the market maker in order to decrease the bid-ask spread offered on the asset.…”

Section: Introductionmentioning

confidence: 99%

Optimal incentives in a limit order book: a SPDE control approach

Baldacci¹,

Bergault²

2021

Preprint

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With the fragmentation of electronic markets, exchanges are now competing in order to attract trading activity on their platform. Consequently, they developed several regulatory tools to control liquidity provision / consumption on their liquidity pool. In this paper, we study the problem of an exchange using incentives in order to increase market liquidity. We model the limit order book as the solution of a stochastic partial differential equation (SPDE) as in [12]. The incentives proposed to the market participants are functions of the time and the distance of their limit order to the mid-price. We formulate the control problem of the exchange who wishes to modify the shape of the order book by increasing the volume at specific limits. Due to the particular nature of the SPDE control problem, we are able to characterize the solution with a classic Feynman-Kac representation theorem. Moreover, when studying the asymptotic behavior of the solution, a specific penalty function enables the exchange to obtain closed-form incentives at each limit of the order book. We study numerically the form of the incentives and their impact on the shape of the order book, and analyze the sensitivity of the incentives to the market parameters.

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“…The size of the spread is also one of the main components of traders transaction costs. A related work by El Euch et al [7], proposed a model for an exchange (or a regulator) who is aiming to attract liquidity to the market. The exchange was looking for the best make-take fees policy to offer to market-makers in order to maximise its utility.…”

Section: Introductionmentioning

confidence: 99%

Phase Transitions in Kyle's Model with Market Maker Profit Incentives

Lehalle¹,

Neuman²,

Shlomov³

2021

Preprint

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We consider a stochastic game between three types of players: an inside trader, noise traders and a market maker. In a similar fashion to Kyle's model, we assume that the insider first chooses the size of her market-order and then the market maker determines the price by observing the total order-flow resulting from the insider and the noise traders transactions. In addition to the classical framework, a revenue term is added to the market maker's performance function, which is proportional to the order flow and to the size of the bid-ask spread. We derive the maximizer for the insider's revenue function and prove sufficient conditions for an equilibrium in the game. Then, we use neural networks methods to verify that this equilibrium holds. We show that the equilibrium state in this model experience interesting phase transitions, as the weight of the revenue term in the market maker's performance function changes. Specifically, the asset price in equilibrium experience three different phases: a linear pricing rule without a spread, a pricing rule that includes a linear mid-price and a bid-ask spread, and a metastable state with a zero mid-price and a large spread.

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Optimal Make-Take Fees for Market Making Regulation

Cited by 15 publications

References 36 publications

Paying for Market Liquidity: Competition and Incentives

Paying for Market Liquidity: Competition and Incentives

Optimal incentives in a limit order book: a SPDE control approach

Phase Transitions in Kyle's Model with Market Maker Profit Incentives

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