Liquidity Provider Incentives in Fragmented Securities Markets
Forthcoming in Journal of Empirical Finance
Posted: 19 May 2017 Last revised: 27 Nov 2020
Date Written: May 22, 2019
We test theoretical predictions of changes in make/take fees in a setting with isolated make rebates for liquidity providers on a single trading venue (Xetra) by examining the impact on both Xetra and the overall market. The rebates lead to higher quoted depth but do not change bid-ask spreads or trading volume on Xetra. For the overall market, no change in trading volume or liquidity is observable. This shows that market participants redistribute their orders to the venue offering fee rebates rather than providing additional liquidity to the overall market. Consequently, the impact of fee changes depends on the setting.
Keywords: Liquidity, Trading Volume, Market Fragmentation, Liquidity Provider Incentives, Transaction Costs
JEL Classification: G10, G14
Suggested Citation: Suggested Citation