Why Maker-Taker Fees Improve Exchange Quality: Theory and Natural Experimental Evidence

63 Pages Posted: 13 Sep 2017 Last revised: 14 Aug 2020

See all articles by Yiping Lin

Yiping Lin

University of New South Wales; Capital Markets CRC Limited (CMCRC)

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Frederick H. deB. Harris

Wake Forest University; Capital Markets CRC Limited (CMCRC)

Date Written: March 14, 2019

Abstract

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

Suggested Citation

Lin, Yiping and Swan, Peter Lawrence and Harris, Frederick (Rick) H. deB., Why Maker-Taker Fees Improve Exchange Quality: Theory and Natural Experimental Evidence (March 14, 2019). Available at SSRN: https://ssrn.com/abstract=3034901 or http://dx.doi.org/10.2139/ssrn.3034901

Yiping Lin (Contact Author)

University of New South Wales ( email )

Sydney, NSW 2052
Australia

Capital Markets CRC Limited (CMCRC) ( email )

Level 2, 55 Harrington Street, The Rocks
Sydney, 2000
Australia

Peter Lawrence Swan

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Frederick (Rick) H. deB. Harris

Wake Forest University ( email )

2601 Wake Forest Road
Babcock Graduate School of Management
Winston-Salem, NC 27109
United States
336-758-5112 (Phone)

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

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