Liquidity Provision Under Flat Commissions in a Maker-Taker World

65 Pages Posted: 3 Dec 2020 Last revised: 5 Aug 2022

See all articles by Michael Brolley

Michael Brolley

Wilfrid Laurier University - Lazaridis School of Business and Economics

Katya Malinova

McMaster University - Michael G. DeGroote School of Business

Date Written: November 6, 2020

Abstract

Many equity exchanges charge the two parties of a trade different fees, often subsidizing liquidity providers. We examine this asymmetric, or maker-taker, pricing in a model where some investors pay fees directly to the exchange, while others pay them only on average, through flat commissions. When the latter investor group is large, maker-taker pricing is distortionary: incentivized by the lower liquidity provider fees (or rebates), investors who pay fees directly become de facto market makers. The aggregate gains from trade decline, and there is redistribution from flat-fee investors to those who pay fees directly. Reducing the fee asymmetry or lowering the share of investors who face flat commissions mitigate the distortions.

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

JEL Classification: G10, G12

Suggested Citation

Brolley, Michael and Malinova, Katya, Liquidity Provision Under Flat Commissions in a Maker-Taker World (November 6, 2020). Available at SSRN: https://ssrn.com/abstract=3726190 or http://dx.doi.org/10.2139/ssrn.3726190

Michael Brolley (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( 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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