Internalization, Clearing and Settlement, and Liquidity

46 Pages Posted: 2 Feb 2012

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance

Gunther Wuyts

KU Leuven - University of Leuven

Multiple version iconThere are 4 versions of this paper

Date Written: December 1, 2011


We study the relation between liquidity in …financial markets and post-trading fees (i.e. clearing and settlement fees). The clearing and settlement agent (CSD) faces different marginal costs for different types of transactions. Costs are lower for an internalized transaction, i.e. when buyer and seller originate from the same broker. We study two fee structures that the CSD applies to cover its costs. The …fist is a uniform fee on all trades (internalized and non-internalized) such that the CSD breaks even on average. Traders then maximize trading rates and higher post-trading fees increase observed liquidity in the market. The second fee structure features a CSD breaking even by charging the internalized and non-internalized trades their respective marginal cost. In this case, traders face the following trade-off: address all possible counterparties at the expense of considerable post-trading fees, or enjoy lower post-trading fees by targeting own-broker counterparties only. This difference in post-trading fees drives traders' strategies and thus liquidity. Furthermore, across the two fee structures, we …find that observed liquidity may differ from cum-fee liquidity (which encompasses the post-trading fees). With trade-speci…fic fees, the cum-fee spread depends on the interacting counterparties. Next, regulators can improve welfare by imposing a particular fee structure. The optimal fee structure hinges on the magnitude of the post-trading costs. Noteworthy, a fee structure yielding higher social welfare may in fact reduce observed liquidity. Finally, we consider a number of extensions including market power for the CSD, anonymous trading and differences in broker size.

Keywords: transaction fees, internalization, clearing and settlement, liquidity, anonymity

JEL Classification: G10, G15

Suggested Citation

Degryse, Hans and Van Achter, Mark and Wuyts, Gunther, Internalization, Clearing and Settlement, and Liquidity (December 1, 2011). Available at SSRN: or

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000

Centre for Economic Policy Research (CEPR)

United Kingdom

Mark Van Achter (Contact Author)

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
P.O. Box 1738
3000 DR Rotterdam
+31 10 40 82 953 (Phone)
+31 10 40 89 017 (Fax)


Gunther Wuyts

KU Leuven - University of Leuven ( email )

KU Leuven - Faculty of Business and Economics
Naamsestraat 69
Leuven, Vlaams-Brabant 3000
+3216326731 (Phone)


Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics