Exchange Fees and Overall Trading Costs

24 Pages Posted: 18 Jun 2020

See all articles by Marco Di Maggio

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Jerry Liu

Dimensional Fund Advisors

Savina Rizova

Dimensional Fund Advisors

Ryan Wiley

Dimensional Fund Advisors

Date Written: June 12, 2020

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

Suggested Citation

Di Maggio, Marco and Liu, Jerry and Rizova, Savina and Wiley, Ryan, Exchange Fees and Overall Trading Costs (June 12, 2020). Available at SSRN: https://ssrn.com/abstract=3625801 or http://dx.doi.org/10.2139/ssrn.3625801

Marco Di Maggio

Harvard Business School ( email )

Soldiers Field
Baker Library 265
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jerry Liu (Contact Author)

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Savina Rizova

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Ryan Wiley

Dimensional Fund Advisors ( email )

1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
United States
3103958005 (Phone)
90401 (Fax)

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