Why Maker-Taker Fees Improve Exchange Quality: Theory and Natural Experimental Evidence
63 Pages Posted: 13 Sep 2017 Last revised: 14 Aug 2020
Date Written: March 14, 2019
This paper extends and tests asymmetric information models of the limit order book to encompass exchange fee structures in a competitive environment with continuous pricing. Informed traders control the degree of information in their orders to fully exploit make/take rebates and fees which do not wash out, unlike their portrayal in the extant literature. We test this implication using NASDAQ’s “quasi-natural” experiment with a unilateral maker-taker fee/rebate reduction. Our results show that the cum-fee spread narrows due to the flight of highly informed orders to the remaining highest rebates resulting in a welfare loss and a worsening of venue price efficiency.
Keywords: Maker-Taker Fee, Exchange Competition, Market Quality, High Frequency Trading
JEL Classification: G12, G14
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