Inverted Fee Venues and Market Quality
52 Pages Posted: 23 Mar 2017 Last revised: 22 Feb 2018
Date Written: February 13, 2018
Stock exchanges compete for order flow 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, the SEC Tick Size Pilot. We find that trading on inverted venues improves pricing efficiency and liquidity when the minimum tick size is binding. We show that by offering traders sub-tick price improvement, inverted fee venues enhance competition for liquidity provision and increase information impounded into prices through limit orders.
Keywords: exchange fees, inverted venues, dark trading
JEL Classification: G14
Suggested Citation: Suggested Citation