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Optimal make–take fees for market making regulation

Author

Listed:
  • Omar El Euch
  • Thibaut Mastrolia
  • Mathieu Rosenbaum
  • Nizar Touzi

Abstract

We address the mechanism design problem of an exchange setting suitable make– take fees to attract liquidity on its platform. Using a principal–agent approach, we provide the optimal compensation scheme of a market maker in quasi‐explicit form. This contract depends essentially on the market maker inventory trajectory and on the volatility of the asset. We also provide the optimal quotes that should be displayed by the market maker. The simplicity of our formulas allows us to analyze in details the effects of optimal contracting with an exchange, compared to a situation without contract. We show in particular that it improves liquidity and reduces trading costs for investors. We extend our study to an oligopoly of symmetric exchanges and we study the impact of such common agency policy on the system.

Suggested Citation

  • Omar El Euch & Thibaut Mastrolia & Mathieu Rosenbaum & Nizar Touzi, 2021. "Optimal make–take fees for market making regulation," Mathematical Finance, Wiley Blackwell, vol. 31(1), pages 109-148, January.
    • Handle: RePEc:bla:mathfi:v:31:y:2021:i:1:p:109-148
    DOI: 10.1111/mafi.12295
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    References listed on IDEAS

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    Cited by:

    1. Bastien Baldacci & Philippe Bergault & Dylan Possamai, 2022. "A mean-field game of market-making against strategic traders," Papers 2203.13053, arXiv.org.
    2. Johannes Muhle-Karbe & Eyal Neuman & Yonatan Shadmi, 2024. "Fluid-Limits of Fragmented Limit-Order Markets," Papers 2407.04354, arXiv.org.
    3. Bingyan Han, 2022. "Can maker-taker fees prevent algorithmic cooperation in market making?," Papers 2211.00496, arXiv.org.
    4. Hua Xiao & Tong Xu & Huyang Xu & Yong Lin & Manjing Sun & Manyi Tan, 2022. "Production Capacity Reserve Strategy of Emergency Medical Supplies: Incentive Model for Nonprofit Organizations," Sustainability, MDPI, vol. 14(18), pages 1-16, September.
    5. Daniel Krv{s}ek & Dylan Possamai, 2023. "Randomisation with moral hazard: a path to existence of optimal contracts," Papers 2311.13278, arXiv.org.
    6. Dylan Possamai & Chiara Rossato, 2023. "Golden parachutes under the threat of accidents," Papers 2312.02101, arXiv.org, revised Sep 2024.

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