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Inverted Fee Venues and Market Quality

54 Pages Posted: 23 Mar 2017 Last revised: 19 Dec 2017

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

Vincent Gregoire

University of Melbourne - Department of Finance

Zhuo Zhong

The University of Melbourne - Department of Finance

Date Written: December 18, 2017

Abstract

Stock exchanges incentivize the demand and supply of liquidity through their fee models. A traditional model pays a rebate to the liquidity supplier, and an inverted model pays a rebate to liquidity demanders. We examine the impact of inverted fee models on market quality using an exogenous shock to inverted venue market share created by a regulatory intervention. We find that higher inverted venue share improves pricing efficiency and liquidity when the minimum tick size is constrained. We show that by offering traders sub-tick price improvement inverted fee venues enhance competition for liquidity provision and increases information impounded into prices through limit orders.

Keywords: exchange fees, inverted venues, dark trading

JEL Classification: G14

Suggested Citation

Comerton-Forde, Carole and Gregoire, Vincent and Zhong, Zhuo, Inverted Fee Venues and Market Quality (December 18, 2017). Available at SSRN: https://ssrn.com/abstract=2939012

Carole Comerton-Forde

UNSW Business School ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Vincent Gregoire

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Zhuo Zhong (Contact Author)

The University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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