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The Term Structure of Liquidity Provision

We examine the term structure of liquidity provision in all stocks from 100 milliseconds to 600 seconds after each trade for 2000-2015. At a one second horizon, the aggregate price of liquidity provision, net of losses to information, fell from 17 basis points of total dollar volume in 2000 to 1.5 basis points in 2015. Regulatory changes, technological shocks, and changes in the industrial organization of markets are associated with declines in the price of liquidity provision, and with changes in the term structure. Over the 16-year period, the slope of the term structure is increasingly steep, consistent with intense non-price (i.e. speed) competition. The term structure and profitability of market-making is closely tied to market, rather than idiosyncratic, risk. This is consistent with electronic market makers managing liquidity provision in large well-diversified portfolios of securities.