Trading Fees and Efficiency in Limit Order Markets
68 Pages Posted: 26 May 2011
There are 2 versions of this paper
Trading Fees and Efficiency in Limit Order Markets
Date Written: May 2011
Abstract
We study competition between a dealer (OTC) market and a limit order market. In the limit order market, investors can choose to be "makers" (post limit orders) or "takers" (hit limit orders) whereas in the dealer market they must trade at dealers' quotes. Moreover, in the limit order market, investors pay a trading fee to the operator of this market ("the matchmaker"). We show that an increase in the matchmaker's trading fee can raise investors' ex-ante expected welfare. Actually, it induces makers to post more aggressive offers and thereby it raises the likelihood of a direct trade between investors. For this reason as well, a reduction in the matchmaker's trading fee can counter-intuitively raise the OTC market share. However, entry of a new matchmaker results in an improvement in investors' welfare, despite its negative effect on trading fees. The model has testable implications for the effects of a change in trading fees and their breakdown between makers and takers on various measures of market liquidity.
Keywords: inter-market competition, Limit order markets, liquidity, make/take fees, OTC markets, trading fees
JEL Classification: G00, G18, G20, L10
Suggested Citation: Suggested Citation
Here is the Coronavirus
related research on SSRN
Recommended Papers
-
Liquidity Cycles and Make/Take Fees in Electronic Markets
By Thierry Foucault, Ohad Kadan, ...
-
Liquidity Cycles and Make/Take Fees in Electronic Markets
By Thierry Foucault, Ohad Kadan, ...
-
Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality
By Katya Malinova and Andreas Park
-
Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality
By Katya Malinova and Andreas Park
-
Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality
By Katya Malinova and Andreas Park
-
Internalization, Clearing and Settlement, and Liquidity
By Hans Degryse, Mark Van Achter, ...
-
Internalization, Clearing and Settlement, and Liquidity
By Hans Degryse, Mark Van Achter, ...
-
Internalization, Clearing and Settlement, and Liquidity
By Hans Degryse, Mark Van Achter, ...
-
Plumbing of Securities Markets: The Impact of Post-Trade Fees on Trading and Welfare
By Hans Degryse, Mark Van Achter, ...
Trading Fees and Efficiency in Limit Order Markets
This is a CEPR Discussion Paper. CEPR charges a fee of $8.00 for this paper.
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.
