Can Brokers Have It All? On the Relation between Make Take Fees & Limit Order Execution Quality
Robert H. Battalio
University of Notre Dame - Department of Finance
Shane A. Corwin
University of Notre Dame - Mendoza College of Business
Robert H. Jennings
Indiana University - Kelley School of Business - Department of Finance
March 5, 2014
We identify retail brokers that seemingly route orders to maximize order flow payments: selling market orders and routing limit orders to venues paying large liquidity rebates. Because venues offering high rebates also charge liquidity demanding investors high fees, fee structure may affect the arrival rate of marketable orders. If limit orders on low-fee venues fill when similarly priced orders on high-fee venues do not, routing orders to maximize rebates might not always be in customers’ best interests. Using proprietary limit order data, we document a negative relation between several measures of limit order execution quality and the relative fee level. Specifically, we show that when ‘identical’ limit orders are concurrently displayed on two venues, orders routed to the low-fee venue execute more frequently and suffer lower adverse selection. Using the NYSE’s TAQ data, we show that the negative relation between take fees and execution quality extends beyond our proprietary dataset.
Number of Pages in PDF File: 52
Keywords: make take fees, limit order execution quality, best execution
JEL Classification: G10, G23
Date posted: December 15, 2013 ; Last revised: May 13, 2014
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