Inverted Fee Venues and Market Quality
54 Pages Posted: 23 Mar 2017 Last revised: 19 Dec 2017
Date Written: December 18, 2017
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: Suggested Citation