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Inverted Fee Venues and Market Quality

48 Pages Posted: 23 Mar 2017  

Carole Comerton-Forde

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Vincent Gregoire

University of Melbourne - Department of Finance

Zhuo Zhong

University of Melbourne - Department of Finance

Date Written: March 20, 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 – the 2016 Tick Size Pilot. We show higher inverted venue share improves pricing efficiency, increases liquidity and decreases volatility. Our findings suggest that the finer pricing grid provided by inverted venues encourages competition between liquidity providers and improves market quality.

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 (March 20, 2017). Available at SSRN: https://ssrn.com/abstract=2939012

Carole Comerton-Forde

University of Melbourne - Department of Finance ( email )

198 Berkeley Street
Carlton VIC 3010
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)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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