Cross-Sided Liquidity Externalities

WW Tham, Elvira Sojli, J Skjeltorp

Research output: Contribution to journalArticleAcademicpeer-review

5 Citations (Scopus)


We study the empirical relevance of the participation externality between liquidity suppliers (makers) and demanders (takers), i.e., whether liquidity demand attracts or reduces liquidity supply, and vice versa. We use exogenous shocks to exchange fees and technology as experiments to identify cross-sided complementarities between liquidity suppliers and demanders in the U.S. equity market. We find that the externality is large and positive, on average. However, the externality is negative in periods of high adverse selection. We quantify the economic significance of the externality by evaluating an exchange’s revenue after a fee change.
Original languageEnglish
Pages (from-to)2473-2972
Number of pages500
JournalManagement Science
Issue number6
Publication statusPublished - 16 May 2020


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