Why Maker-Taker Venues Facilitate Price Discovery? Quasi-Natural Experimental Evidence

Abstract

The extant literature argues that the minimum tick is sufficient to prevent exchange access fee “washout” but cannot be reconciled with the association between fees and adverse selection.  We provide a new theory of  access fees in which they interact with the SEC’s NMS rules to provoke vast heterogeneity in fee structures across 300 differing venues. Fee structures are shown to raise utility in inverted venues relative to maker-taker venues while leaving aggregate trader utility unaltered. We test these implications with a unilateral maker-taker fee/rebate reduction using NASDAQ’s ‘quasi-natural’ 1.9 trillion-dollar experiment, finding support for our theory.

Keywords: Maker-Taker Fee, adverse selection, Price discovery, RegNMS, Fee Pilot