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

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  • KATYA MALINOVA
  • ANDREAS PARK

Abstract

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.

Suggested Citation

  • Katya Malinova & Andreas Park, 2015. "Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality," Journal of Finance, American Finance Association, vol. 70(2), pages 509-536, April.
    • Handle: RePEc:bla:jfinan:v:70:y:2015:i:2:p:509-536
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    File URL: http://hdl.handle.net/10.1111/jofi.12230
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