Exchange Fees and Overall Trading Costs

Abstract

In the US market, two popular exchange fee structures are “maker-taker” and “inverted” (also known as “taker-maker”). Maker-taker exchanges charge fees for taking liquidity and give rebates for providing liquidity, while inverted exchanges give rebates for taking liquidity and charge fees for providing liquidity. Using live trade data from an institutional investor that applies a flexible trading approach and seeks to participate in the natural market liquidity, we find that net of fees and rebates, trading costs are statistically indistinguishable between maker-taker and inverted exchanges. This finding has important implications for venue routing decisions in trading algorithms that do not demand immediacy, suggesting that the optimal routing strategy in terms of the tradeoff between cost and volume per unit of time is a pro-rata allocation across venues. It is also relevant to the recent discussions on legislation to fix fees across all trading venues.

Keywords: trading, trading venues, fees, rebates, market microstructure, regulation, liquidity

JEL Classification: G11, G12, G23, G28