Trading Fees and Intermarket Competition

Abstract

Regulators, exchanges, and politicians are considering reining in maker-taker pricing, which is used as a competitive tool by trading venues to acquire order flow. Examining the 2013 reduction in trading fees operated by BATS on its European venues, we document significant effects on market quality and market share both on BATS and in competing venues. Interestingly, we identify cross sectional differences which suggest that traders in large (small) capitalization stocks are more sensitive to changes in make (take) fees. Our results are consistent with the predictions derived from a model of two competing order books that employ trading fees.

Keywords: Trading Fees, Access Fees, Maker-Taker Pricing, Intermarket Competition, Limit Order Book

JEL Classification: G10, G12, G14, G18, G20, D40, D47