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Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

44 Pages Posted: 14 Oct 2011 Last revised: 10 Sep 2014

Katya Malinova

University of Toronto

Andreas Park

University of Toronto - Finance Area

Multiple version iconThere are 3 versions of this paper

Date Written: March 13, 2014

Abstract

Facing increased competition, over the last decade many stock exchanges changed their trading fees to maker-taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in the fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. Yet, as posted bid-ask spreads decline, traders, in particular retail, use aggressive orders more frequently, and adverse selection costs decrease.

Keywords: Liquidity credits, market quality, trading, make/take fees, maker-taker, rebates, bid-ask spread

JEL Classification: G12, G14

Suggested Citation

Malinova, Katya and Park, Andreas, Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality (March 13, 2014). Journal of Finance, Forthcoming; Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1944054 or http://dx.doi.org/10.2139/ssrn.1944054

Katya Malinova (Contact Author)

University of Toronto ( email )

Department of Statistical Sciences
Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://individual.utoronto.ca/kmalinova/

Andreas Park

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

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