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

Katya Malinova | Zendy; Andreas Park | Zendy

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

Author(s) -

Katya Malinova,

Andreas Park

Publication year - 2011

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.1823600

Subject(s) - market liquidity , market maker , business , adverse selection , incentive , competition (biology) , transaction cost , subsidy , stock exchange , liquidity crisis , stock (firearms) , monetary economics , economics , finance , stock market , microeconomics , market economy , mechanical engineering , paleontology , ecology , horse , engineering , biology

type="main"> 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.

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