Working paper

Who supplies liquidity, how and when?

Bruno Biais, Fany Declerck, and Sophie Moinas


Who provides liquidity in modern, electronic limit order book, markets? While agency trading can be constrained by conflicts of interest and information asymmetry between customers and traders, prop traders are likely to be less constrained and thus better positioned to carry inventory risk. Moreover, while slow traders'limit orders may be exposed to severe adverse selection, fast trading technology can improve traders'ability to monitor the market and avoid being picked off. To shed light on these points, we rely on unique data from Euronext and the AMF enabling us to observe the connectivity of traders to the market, and whether they are proprietary traders. We find that proprietary traders, be they fast or slow, provide liquidity with contrarian marketable orders, thus helping the market absorb shocks, even during crisis, and earn profits doing so. Moreover, fast traders provide liquidity by leaving limit orders in the book. Yet, only prop traders can do so without making losses. This suggests that technology is not enough to overcome adverse selection, monitoring incentives are also needed.


Liquidity; high-frequency trading; proprietary trading; adverse selection; electronic limit order book; short-term momentum; contrarian;

JEL codes

  • D82: Asymmetric and Private Information • Mechanism Design
  • G1: General Financial Markets

See also

Published in

TSE Working Paper, n. 17-818, June 2017