@article{4808a07ccd4241ce910068af64b5cb36,
title = "Who provides liquidity, and when?",
abstract = "We model competition for liquidity provision between high-frequency traders (HFTs) and slower execution algorithms (EAs) designed to minimize investors{\textquoteright} transaction costs. Under continuous pricing, EAs dominate liquidity provision by using aggressive limit orders to stimulate HFTs{\textquoteright} 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.",
keywords = "Algorithmic trading, Bid-ask spread, High-frequency trading, Liquidity, Tick size",
author = "Sida Li and Xin Wang and Mao Ye",
note = "For helpful comments and suggestions, we thank Ron Kaniel (the co-editor), Albert (Pete) Kyle (the referee), Hengjie Ai, Shmuel Baruch, Malcolm Baker, Dan Bernhardt, Hank Bessembinder, Eric Budish, Tarun Chordia, Thierry Foucault, Larry Glosten, Larry Harris, Katya Malinova, Jingyuan Mo, Joseph Noss, Maureen O'Hara, Monika Piazzesi, Veronika Pool, Neil Pearson, Barbara Rindi, Shrihari Santosh, Andriy Shkilko, Brian Weller, Chen Yao, Bart Yueshen, Marius Zoican, and seminar participants at the University of Rochester, University of California at Los Angeles, Texas A\&M University, the University of Florida, and Washington University at St. Louis, as well as conference participants at the Society for Financial Studies (SFS) Cavalcade, the Carlson Junior Conference at the University of Minnesota, the New York University (NYU) Stern Market Microstructure Conference, the Second Sustainable Architecture for Finance in Europe (SAFE) Market Microstructure Conference, the Colorado Front Range Finance Seminar, the Bank of Canada\textbackslash{}u2014Laurier Market Structure conference, the Telfer Annual Conference on Accounting and Finance, the Wabash River Conference at Indiana University, the Smokey Mountain Conference at the University of Tennessee, the 2019 Financial Intermediation Research Society (FIRS) Conference, and the Conference on Financial Stability Implications of New Technology organized by the Federal Reserve Bank of Atlanta and Georgia State University. 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.",
year = "2021",
month = sep,
doi = "10.1016/j.jfineco.2021.04.020",
language = "English (US)",
volume = "141",
pages = "968--980",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier B.V.",
number = "3",
}