Cost of providing liquidity and organization of order-driven markets.

Summary The thesis is part of the "microstructure of financial markets" framework. Its objective is to study the impact of market organization on the supply of liquidity to market participants, and thus on market performance. The first test focuses on the quoting strategies of market makers in multiple markets. We consider two risk-averse market makers competing for order flow on two markets simultaneously. We show that the coexistence of an alternative trading system influences the market makers' reserve prices, which take into account the possibility that their quotes are affected either on the same or on opposite sides of the two markets. Moreover, unlike the traditional paradigm, the market maker with the most extreme position does not always place the best price. Our results thus suggest several empirical predictions about the interactions between liquidity bids in multiple markets. They also allow us to study the impact of several reforms on market performance. In particular, we show that requiring market makers to place identical quotes in multiple systems increases the ranges of best prices quoted in the dominant market. The second essay focuses on liquidity supply strategies in an anonymous order-driven market and a non-anonymous market. The model is based on the idea that some limit order placers have privileged information about the size of future price changes. We show that the move to anonymity affects market liquidity and the information content of the order book. In light of these results, we study the switch to anonymity on the Paris stock exchange, which took place on April 23, 2001. We first find that the order book contains information about future volatility, which corroborates our postulate. We then show that the change in transparency significantly reduced not only the price ranges, but also the information content of the order book, consistent with the predictions of the theoretical model. In the final essay, we study liquidity supply strategies in an opaque order-driven market that allows hidden limit orders, and in a transparent market that does not. The model is based on the idea that some limit order placers possess private information about the long-run value of the asset. Since the order book partially reveals this information, which decreases the likelihood of execution of informed orders, an informed liquidity provider can use these hidden orders not to mitigate the impact of his order. The model allows us to suggest new empirical predictions. Furthermore, we find that allowing hidden orders improves efficiency. On the other hand, counter-intuitively, it increases the transaction costs of liquidity seekers, and may decrease the expected profits of an informed liquidity provider.