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Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality
Author(s) -
MALINOVA KATYA,
PARK ANDREAS
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12230
Subject(s) - market liquidity , market maker , business , adverse selection , incentive , competition (biology) , transaction cost , subsidy , stock exchange , monetary economics , liquidity crisis , stock (firearms) , economics , finance , stock market , microeconomics , market economy , mechanical engineering , paleontology , ecology , horse , engineering , biology
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.