Plumbing of Securities Markets: The Impact of Post-Trade Fees on Trading and Welfare

30 Pages Posted: 17 Mar 2012 Last revised: 21 Oct 2016

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: October 20, 2016

Abstract

We analyze how costs related to the "plumbing" (i.e., clearing, settlement, and custody) of securities markets affect market quality and welfare. Our model compares two post-trade fee structures for allocating these costs. One charges a uniform fee for all trades, the other, marginal-cost-based structure a reduced fee for internalized trades (which, both traders being from the same broker, are less costly to process). The fee structure affects quote aggressiveness and (the composition of) trading volume. With marginal-cost-based fees, traders decide which counterparties to target through quote aggressiveness, trading off execution probability against fee. Both fee structures are shown to be inefficient, as they impede welfare-improving trades within and across brokers, respectively.

Keywords: clearing and settlement, financial market infrastructure, internalization, market quality

JEL Classification: G10, G15

Suggested Citation

Degryse, Hans and Van Achter, Mark and Wuyts, Gunther, Plumbing of Securities Markets: The Impact of Post-Trade Fees on Trading and Welfare (October 20, 2016). Available at SSRN: https://ssrn.com/abstract=2023597 or http://dx.doi.org/10.2139/ssrn.2023597

Hans Degryse (Contact Author)

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

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance ( email )

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

HOME PAGE: http://www.rsm.nl/mvanachter

Gunther Wuyts

KU Leuven - University of Leuven ( email )

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

HOME PAGE: http://www.econ.kuleuven.be/gunther.wuyts

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