Abstract
We develop a model in which the speed of reaction to trading opportunities is endogenous. Traders face a trade-off between the benefit of being first to seize a profit opportunity and the cost of attention required to be first to seize this opportunity. The model provides an explanation for maker/taker pricing, and has implications for the effects of algorithmic trading on liquidity, volume, and welfare. Liquidity suppliers' and liquidity demanders' trading intensities reinforce each other, highlighting a new form of liquidity externalities. Data on durations between trades and quotes could be used to identify these externalities.
| Original language | English |
|---|---|
| Pages (from-to) | 299-341 |
| Number of pages | 43 |
| Journal | Journal of Finance |
| Volume | 68 |
| Issue number | 1 |
| DOIs | |
| State | Published - Feb 2013 |