Cross-Sided Liquidity Externalities

The paper studies relevance of the cross-sided externality between liquidity makers and takers from the two-sided market perspective. We use exogenous changes in the make/take fee structure, minimum tick-size and technology for liquidity suppliers and demanders, as experiments to identify cross-sided complementarities between liquidity suppliers and demanders in the U.S. equity market. We find that the externality is on average positive, but it decreases with adverse selection. We quantify the economic significance of the externality by evaluating an exchange's revenue after a make/take fee change