Inverted Fee Structures, Tick Size, and Market Quality

56 Pages Posted: 23 Mar 2017 Last revised: 10 Sep 2018

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

Vincent Gregoire

HEC Montreal - Department of Finance

Zhuo Zhong

University of Melbourne - Department of Finance

Date Written: August 10, 2018

Abstract

Stock exchanges compete for order flow through their fee models. A traditional model pays rebates to liquidity suppliers, and an inverted model pays rebates to liquidity demanders. Using a regulatory intervention to examine the interaction between tick size, restrictions on dark trading, and exchange fees we show that traders use inverted venues to adjust for suboptimal tick sizes. Increased inverted venue activity improves pricing efficiency and liquidity, especially when the tick size is binding. We show that the sub-tick price improvement offered by inverted venues enhances competition for liquidity provision and increases information impounded into prices through non-marketable 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 Structures, Tick Size, and Market Quality (August 10, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2939012 or http://dx.doi.org/10.2139/ssrn.2939012

Carole Comerton-Forde

UNSW Business School ( email )

UNSW Business School
High St
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

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Zhuo Zhong (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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