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Plumbing of Securities Markets: The Impact of Post-trade Fees on Trading and Welfare

Author

Listed:
  • Hans Degryse

    (KU Leuven, Leuven, Flanders, Belgium 3000; Centre for Economic Policy Research, London, UK EC1V 0DX)

  • Mark Van Achter

    (KU Leuven, Leuven, Flanders, Belgium 3000; The Liquid House, Antwerp, Belgium, 2000)

  • Gunther Wuyts

    (KU Leuven, Leuven, Flanders, Belgium 3000)

Abstract

We analyze how market design choices about counterparty information and costs related to the “plumbing” (i.e., clearing, settlement, and custody) of securities markets affect market quality and welfare. Our model compares two post-trade fee structures for allocating these costs. One charges a uniform fee for all trades and the other, marginal cost–based structure a reduced fee for internalized trades (which, both traders being from the same broker, is less costly to process). Both market design and fee structure affect quote aggressiveness and trading volume and its composition. With marginal cost–based fees and counterparty information being available, traders decide which counterparties to target through quote aggressiveness, trading off execution probability against fee. A social planner can maximize welfare by requiring marginal cost–based fees and providing traders the choice to disclose counterparty information.

Suggested Citation

  • Hans Degryse & Mark Van Achter & Gunther Wuyts, 2022. "Plumbing of Securities Markets: The Impact of Post-trade Fees on Trading and Welfare," Management Science, INFORMS, vol. 68(1), pages 635-653, January.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:1:p:635-653
    DOI: 10.1287/mnsc.2020.3880
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