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Inverted fee structures, tick size, and market quality

Author

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  • Comerton-Forde, Carole
  • Grégoire, Vincent
  • Zhong, Zhuo

Abstract

Stock exchanges compete for order flow through their fee models. A traditional model pays rebates to liquidity suppliers, and an inverted model pays rebates to liquidity demanders. Using a regulatory intervention to examine the interaction between tick size, restrictions on dark trading, and exchange fees, we show that traders use inverted venues to adjust for suboptimal tick sizes. Increased inverted venue activity improves pricing efficiency and liquidity, especially when the tick size is binding. We show that the sub-tick price improvement offered by inverted venues enhances competition for liquidity provision and increases information impounded into prices through nonmarketable limit orders.

Suggested Citation

  • Comerton-Forde, Carole & Grégoire, Vincent & Zhong, Zhuo, 2019. "Inverted fee structures, tick size, and market quality," Journal of Financial Economics, Elsevier, vol. 134(1), pages 141-164.
    • Handle: RePEc:eee:jfinec:v:134:y:2019:i:1:p:141-164
    DOI: 10.1016/j.jfineco.2019.03.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange fees; Inverted venues; Dark trading;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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