Optimal Liquidity Provision in Limit Order Markets

Strategic Liquidity Provision in Limit Order Markets

Liquidity provision and optimal bank regulation

We extend the set of regulatory instruments for banks’ liquidity provision by adding a policy instrument for controlling the fraction of perfectly-liquid accounts. We demonstrate how this instrument induces self-selection on behalf of depositors who are differentiated according to their probability of facing a liquidity shock. This selfselection leads to a market segmentation, which can break t...

Optimal Banking Regulation with Endogenous Liquidity Provision

In a money-search model where deposits are used as means-of-payments, banks have expertise to obtain higher returns from assets with a cost and an economy of scale but are subject to limited commitment and moral hazard. They can pledge a proportion of asset holdings to issue deposits. Optimal regulation trades off efficiency in assetmanagement and liquidity service banks provide. An optimal cha...

The Role of Algorithmic Trading in Stock Liquidity and Commonality in Electronic Limit Order Markets

In investigating the effects of algorithmic trading on stock market liquidity and commonality in liquidity in different market conditions in an electronic limit order market, we find algorithmic trading increases stock liquidity by narrowing quoted and effective bid–ask spreads. Furthermore, algorithmic trading decreases commonality in liquidity; this finding is robust across a variety of liqui...

Limit Order Markets: A Survey

A.V. Thakor. We thank the authors of the research reviewed here for their insights into the microstructure of limit order markets and apologize for any errors or misrepresentations in our discussion of their work. We thank Arnoud Boot for asking us to undertake this survey and for his patience while we completed it.