Trading Fees and Intermarket Competition
58 Pages Posted: 18 Apr 2017 Last revised: 20 Jul 2021
Date Written: January 31, 2017
We model an order book with liquidity rebates (make fees) and trading fees (take fees) that faces intermarket competition, and use the models insights to explain changes in market quality and market shares following changes in make-take fees. As predicted by our model, we document that fee changes by one venue affect market quality and market shares for all venues that compete for order flow. Furthermore, we document cross-sectional differences in changes in market quality and market shares following a simultaneous decrease in both make and take fees consistent with traders in large (small) capitalization stocks being more sensitive to the change in make (take) fees.
Keywords: Trading Fees, Maker-Taker Pricing, Intermarket Competition, Limit Order Book
JEL Classification: G10, G12, G14, G18, G20, D40, D47
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