Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

Katya Malinova, Andreas Park

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

Facing increased competition over the last decade, many stock exchanges changed their trading fees to maker-taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. However, as posted bid-ask spreads decline, traders (particularly retail) use aggressive orders more frequently, and adverse selection costs decrease.
Original languageEnglish
JournalJournal of Finance
Volume70
Issue number2
Pages (from-to)509-536
Number of pages28
ISSN0022-1082
DOIs
Publication statusPublished - 2015

Cite this

Malinova, Katya ; Park, Andreas. / Subsidizing Liquidity : The Impact of Make/Take Fees on Market Quality. In: Journal of Finance. 2015 ; Vol. 70, No. 2. pp. 509-536.
@article{ae98aef7fce5481b96d35055c6466050,
title = "Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality",
abstract = "Facing increased competition over the last decade, many stock exchanges changed their trading fees to maker-taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. However, as posted bid-ask spreads decline, traders (particularly retail) use aggressive orders more frequently, and adverse selection costs decrease.",
author = "Katya Malinova and Andreas Park",
year = "2015",
doi = "10.1111/jofi.12230",
language = "English",
volume = "70",
pages = "509--536",
journal = "Journal of Finance",
issn = "0022-1082",
publisher = "Wiley",
number = "2",

}

Subsidizing Liquidity : The Impact of Make/Take Fees on Market Quality. / Malinova, Katya; Park, Andreas.

In: Journal of Finance, Vol. 70, No. 2, 2015, p. 509-536.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Subsidizing Liquidity

T2 - The Impact of Make/Take Fees on Market Quality

AU - Malinova, Katya

AU - Park, Andreas

PY - 2015

Y1 - 2015

N2 - Facing increased competition over the last decade, many stock exchanges changed their trading fees to maker-taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. However, as posted bid-ask spreads decline, traders (particularly retail) use aggressive orders more frequently, and adverse selection costs decrease.

AB - Facing increased competition over the last decade, many stock exchanges changed their trading fees to maker-taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. However, as posted bid-ask spreads decline, traders (particularly retail) use aggressive orders more frequently, and adverse selection costs decrease.

UR - http://sfx-45cbs.hosted.exlibrisgroup.com/45cbs?url_ver=Z39.88-2004&url_ctx_fmt=info:ofi/fmt:kev:mtx:ctx&ctx_enc=info:ofi/enc:UTF-8&ctx_ver=Z39.88-2004&rfr_id=info:sid/sfxit.com:azlist&sfx.ignore_date_threshold=1&rft.object_id=954921348268&rft.object_portfolio_id=&svc.holdings=yes&svc.fulltext=yes

U2 - 10.1111/jofi.12230

DO - 10.1111/jofi.12230

M3 - Journal article

VL - 70

SP - 509

EP - 536

JO - Journal of Finance

JF - Journal of Finance

SN - 0022-1082

IS - 2

ER -