Lescourret, Laurence and Moinas, Sophie, Liquidity Supply Across Multiple Trading Venues (September 15, 2014). Available for download at SSRN: http://ssrn.com/abstract=2498277

“Market fragmentation and technology have given rise to new trading strategies. One of them is to supply liquidity simultaneously across multiple trading venues, which requires multi-venue management of inventory risk. We build an inventory model in which order flow fragments across two venues, and show that multi-venue market-makers might consolidate the fragmented order flow, leading to lower transaction costs. We also show that multi-venue market-making strategies result in interrelated spreads. We empirically investigate the main predictions of our model using Euronext proprietary data that contains member’s orders and trades identities for multi-listed firms. We find evidence of cross-venue inventory control, in particular for formally registered market-makers. We also find that bid-ask spreads vary with inventories of multi-venue market-makers and the way order flow fragments across all venues, as uniquely predicted by our model.”