European Business Schools Librarian's Group

ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School

No WP1505: Liquidity Supply across Multiple Trading Venues

Laurence Lescourret () and Sophie Moinas ()
Additional contact information
Laurence Lescourret: ESSEC Business School, Postal: AVENUE BERNARD HIRSCH, CS 50105 CERGY, 95021 CERGY PONTOISE CEDEX, FRANCE
Sophie Moinas: Toulouse School of Economics (Toulouse Capitole University and CRM), Postal: Université de Toulouse 1 Capitole, TSE, Place Anatole France, 31000 TOULOUSE, FRANCE

Abstract: Financial markets are increasingly fragmented. How to supply liquidity in this environment? Using an inventory model, we analyze how two strategic intermediaries compete across two venues that can be hit simultaneously by liquidity shocks of equal or opposite signs. Although order flow is fragmented ex-ante, we show that intermediaries might strategically consolidate it ex-post, improving global liquidity. We also fi nd that local spreads co-move together across venues as a result of global inventory management. Using Euronext proprietary data, we uncover new evidence of inventory control across venues and fi nd that local spreads vary in a way uniquely predicted by the model.

Keywords: Market fragmentation; multi-venue market-making; bid-ask spreads

JEL-codes: G10; G12; G20

55 pages, March 2015

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