48 Pages Posted: 23 Mar 2017
Date Written: March 20, 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 – 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: 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