Informed Trading and Maker-Taker Fees in a Low-Latency Limit Order Market

Brolley, Michael; Malinova, Katya

doi:10.2139/ssrn.2178102

Cited by 28 publications

(23 citation statements)

References 28 publications

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“…Consistent with the idea that marketable order flow is sensitive to take fees, Cardella, Hao, and Kalcheva (2015) find that reductions in relative take fees in U.S. equity markets are associated with increased market share. Colliard and Foucault (2012), Foucault, Kadan, and Kandel (2013), and Brolley and Malinova (2013) theoretically model the impact of make-take fees on liquidity supply. Colliard and Foucault (2012) consider how an exchange competing with a dealer market should optimally set its make-take fee schedule.…”

Section: Related Literaturementioning

confidence: 99%

Can Brokers Have It All? On the Relation between Make‐Take Fees and Limit Order Execution Quality

Battalio

Corwin

Jennings

2016

The Journal of Finance

144

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We identify retail brokers that seemingly route orders to maximize order flow payments, by selling market orders and sending limit orders to venues paying large liquidity rebates. Angel, Harris, and Spatt argue that such routing may not always be in customers’ best interests. For both proprietary limit order data and a broad sample of trades from TAQ, we document a negative relation between several measures of limit order execution quality and rebate/fee level. This finding suggests that order routing designed to maximize liquidity rebates does not maximize limit order execution quality and thus brokers cannot have it all.

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Section: Related Literaturementioning

confidence: 99%

Can Brokers Have It All? On the Relation between Make‐Take Fees and Limit Order Execution Quality

Battalio

Corwin

Jennings

2016

The Journal of Finance

144

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show abstract

“…Colliard and Foucault (2012) provide a theoretical benchmark in the absence of market frictions; Foucault, Kadan, and Kandel (2013) and Brolley and Malinova (2012) introduce market frictions. Colliard and Foucault (2012) emphasize, in particular, the importance of distinguishing between a change in the breakdown of the total exchange fee into a maker rebate and a taker fee from the change in the total exchange fee, because only changes in the latter are economically meaningful.…”

Section: Theoretical Predictionsmentioning

confidence: 99%

“…This prediction is supported empirically in Skjeltorp, Sojli, and Tham (2013), and it is not the focus of our study. Brolley and Malinova (2012) argue that the effect of changes in the breakdown of the total fee into a maker rebate and a taker fee is not neutral if some traders only pay them on average, e.g., through a flat commission to their brokers. In their model, only a fraction of traders receive maker rebates for each executed limit order; as the 7 maker rebate increases, these traders improve their quotes and the raw bid-ask spread declines.…”

Section: Changes In the Total Exchange Fee Affect Volume And The Ratimentioning

confidence: 99%

“…As quoted spreads decline, market orders become relatively cheaper for these traders and more of them would choose market over limit orders. In Brolley and Malinova (2012) this behavior is an equilibrium outcome, and the increased usage of market orders causes a decline in adverse selection. The decline stems from the monotonic order choices of informed traders: traders with stronger information use market orders, traders with weaker information use limit orders; see also Kaniel and Liu (2006) and Rosu (2012).…”

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confidence: 99%

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

Malinova

Park

2011

SSRN Journal

Self Cite

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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 the fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. Yet, as posted bid-ask spreads decline, traders, in particular retail, use aggressive orders more frequently, and adverse selection costs decrease. JEL Classification: G12, G14. Keywords: Liquidity rebates, market quality, trading, maker-taker pricing, retail trading * TSX Inc. holds copyright to the data, all rights reserved. It is not to be reproduced or redistributed. TSX Inc. disclaims all representations and warranties with respect to this information, and shall not be liable to any person for any use of this information.The equity trading landscape has changed dramatically over the past two decades, bringing with it a host of new policy concerns. Technological innovation in the 1990s allowed the entry of fully electronic trading platforms, known in the United States as electronic communication networks (ECNs). Subsequent regulatory reforms 1 facilitated the competition among trading platforms, eliminated the privileges of incumbent exchanges, and ultimately forced the incumbents to abandon physical trading floors and become electronic limit order markets.In a limit order market, a trader can either specify the desired price and quantity by posting a limit order or the trader can accept the terms of a previously posted limit order by submitting a market order. To compete for trading volume, during the last decade most equity trading platforms in North America introduced cash incentives for posting attractively priced limit orders. These cash payments are part of an incentive scheme known as maker-taker pricing. Understanding the impact of trading platforms' innovative offerings, such as maker-taker pricing, has become increasingly important in the new competitive environment. In the past, exchanges in North America were non-profit entities with a mandate to serve their members. Facing stiff competition, they converted to shareholder-owned corporations, raising concerns that their profit-motivated "incentive schemes may run counter to the integrity of pricing and investor protection. 2 "Regulatory Role of Exchanges and International Implications of Demutualization" by Roel C. Campos, March 10, 2006, available at http://www.sec.gov/news/speech/spch031006rcc.htm. 1 or aggressive [market] order, is charged a fee." 3 Maker rebates aim to improve liquidity, by rewarding its provision, and to increase trading volume, yet theoretical studies have shown that they need not affect liquidity and that trading volume may, in fact, decline.Angel, Harris, and Spatt (2011) argue that ...

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“…As quoted spreads decline, market orders become relatively cheaper for these traders and more of them would choose market orders over limit orders. In Brolley and Malinova (2012) this behavior is an equilibrium outcome, and the increased use of market orders causes a decline in adverse selection. The decline stems from the monotonic order choices of informed traders: traders with stronger information use market orders, while traders with weaker information use limit orders; see also Kaniel and Liu (2006) and Rosu (2013).…”

mentioning

confidence: 99%