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The impact of make-take fees on market efficiency

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  • Jeffrey R. Black

    (University of Memphis)

Abstract

Stock exchanges structure their trading fees to subsidize liquidity by offering “make” rebates for providing liquidity through limit orders and charging “take” fees for consuming liquidity via marketable orders, leading to debate regarding the impact of these fees on market quality. Using an experiment performed by NASDAQ, I employ difference-in-differences analysis and find that a decrease in take fee and make rebate levels on one exchange leads to greater absolute pricing error and larger variance of mispricing for the market as a whole, beyond that expected from widened bid-ask spreads. This occurs because bid-ask spreads widen and fewer informative trades are executed.

Suggested Citation

  • Jeffrey R. Black, 2022. "The impact of make-take fees on market efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 58(3), pages 1015-1035, April.
    • Handle: RePEc:kap:rqfnac:v:58:y:2022:i:3:d:10.1007_s11156-021-01016-w
    DOI: 10.1007/s11156-021-01016-w
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    References listed on IDEAS

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    More about this item

    Keywords

    Make-take fees; Market efficiency; Market quality; Trading;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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