Liquidity Provider Incentives in Fragmented Securities Markets

Abstract

We study the introduction of single-market liquidity provider incentives in fragmented securities markets. Specifically, we analyze the introduction of the Xetra Liquidity Provider Program at Deutsche Boerse from two perspectives: First, we investigate whether fee-rebates for liquidity providers enhance liquidity on the trading venue thereby increasing its competitiveness and market share. Second, we analyze whether single-market liquidity provider incentives increase aggregate liquidity available in fragmented markets or whether they lead to a redistribution of liquidity among trading venues. Our results show that single-market liquidity provider incentives result in increased liquidity on the market introducing the rebates, a higher contribution of that market to consolidated liquidity, and gains in market share in terms of trading volume. However, we find no significant effect for trading volume and liquidity in the fragmented market as a whole but a redistribution to the venue offering the incentives.