Competition and Exchange Data Fees

Abstract

We investigate how the introduction of market data fees impacts trading and market quality. We find that data fees decrease the fee-introducing exchange’s market volume, time with competitive quotes, visible liquidity, and role in price discovery. Brokers route their market and limit orders away from the impacted exchange. Market-wide, the fee introduction decreases liquidity for large orders and price discovery. The results indicate that some traders have an elastic demand for data and that their response to the introduction of data fees on one exchange can reverberate throughout the stock market.

Keywords: Data Fees, Exchange Competition

JEL Classification: G12, G14