Can Brokers Have It All? On the Relation between Make-Take Fees and Limit Order Execution Quality

Abstract

We identify retail brokers that seemingly route orders to maximize order flow payments: selling market orders and sending limit orders to venues paying large liquidity rebates. Angel, Harris, and Spatt (2011) argue that this type of routing may not always be in customers’ best interests. For both proprietary limit order data and a broad sample of trades from TAQ, we document a negative relation between several measures of limit order execution quality and rebate/fee level. This finding suggests that order routing designed to maximize liquidity rebates does not maximize limit order execution quality and, thus, brokers cannot have it all.

Keywords: make take fees, limit order execution quality, best execution

JEL Classification: G10, G23