Can Brokers Have It All? On the Relation between Make-Take Fees and 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 31, 2015
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. Using a simple model, we demonstrate that this type of routing may not always be in customers’ best interests. For both proprietary limit order data and a broad sample of trades from TAQ, we document a negative relation between several measures of limit order execution quality and rebate/fee level. This finding suggests that order routing designed to maximize liquidity rebates does not maximize limit order execution quality and, thus, brokers cannot have it all.
Number of Pages in PDF File: 51
Keywords: make take fees, limit order execution quality, best execution
JEL Classification: G10, G23
Date posted: December 15, 2013 ; Last revised: April 1, 2015
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