Maker-Taker Fees and Liquidity: The Role of Commission Structures

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See all articles by Michael Brolley

Michael Brolley

Wilfrid Laurier University

Katya Malinova

McMaster University - Michael G. DeGroote School of Business

Date Written: November 6, 2020

Abstract

Equity exchanges typically subsidize liquidity providers through a rebate, and charge liquidity demanders a fee. We model the impact of this asymmetric fee structure in a setting where some traders pay fees directly to the exchange--a "maker-taker trader"--while others incur a flat fee per trade (e.g., through a broker commission). When the fraction of flat-fee traders is sufficiently small, only the total exchange fee per transaction has an economic impact. If sufficiently many investors face flat commissions, however, trading volume and investor welfare fall, with maker-taker traders assuming a de-facto market-maker role. Moreover, maker-taker traders earn higher average profits.

Keywords: Maker-taker fee, liquidity, limit order book

JEL Classification: G10, G12

Suggested Citation

Brolley, Michael and Malinova, Katya, Maker-Taker Fees and Liquidity: The Role of Commission Structures (November 6, 2020). Available at SSRN: https://ssrn.com/abstract=

Michael Brolley (Contact Author)

Wilfrid Laurier University ( email )

Lazaridis Hall, 4071
75 University Avenue
Waterloo, Ontario N2L 3C5
Canada

HOME PAGE: http://www.mikerostructure.com

Katya Malinova

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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