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Why Discrete Price Fragments U.S. Stock Exchanges and Disperses Their Fee Structures

65 Pages Posted: 26 Nov 2014 Last revised: 4 Sep 2017

Yong Chao

University of Louisville - College of Business - Department of Economics

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Mao Ye

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Date Written: June 26, 2017

Abstract

Stock exchange operators compete for order flow by setting "make" fees for limit orders and "take" fees for market orders. When traders quote continuous prices, they can choose prices that perfectly neutralize any fee division, and traders stream to the exchange with the lowest total fee. The one-cent minimum tick size (minimum price variation) for traders prevents perfect neutralization. The two-sided price competition (i) allows an exchange operator to establish exchanges that differ in fee structure to engage in second-degree price discrimination; and (ii) destroys the Bertrand equilibrium, leads to frequent fee changes, and encourages the entry of new exchanges.

Keywords: price dispersion, market fragmentation, make-take fees, exchange competition, two-sided market

JEL Classification: L11, L5, G10, G20

Suggested Citation

Chao, Yong and Yao, Chen and Ye, Mao, Why Discrete Price Fragments U.S. Stock Exchanges and Disperses Their Fee Structures (June 26, 2017). Available at SSRN: https://ssrn.com/abstract=2530572 or http://dx.doi.org/10.2139/ssrn.2530572

Yong Chao

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States
(502)852-3573 (Phone)
(502)852-7672 (Fax)

HOME PAGE: http://yongchao.us

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, N.T.
Hong Kong
852 39433215 (Phone)

HOME PAGE: http://sites.google.com/site/chenyaosite/research

Mao Ye (Contact Author)

University of Illinois at Urbana-Champaign ( email )

406 Wohlers
1206 South 6th Street
Champaign, IL 61820
United States
2172440474 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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