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Boosting Exchange's Market Share: The Impact of No-Fee Trading on Market Quality

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  • Galati, Luca

Abstract

This paper examines the impact of zero fees on market quality. I examine this issue using a natural experiment in Bitcoin provided by the Binance exchange, which eliminated maker-taker trading fees for market participants in July 2022. I find that while zero fees increase investors' willingness to trade, thereby \textit{prima facie} increasing liquidity, such fees' elimination encourages market makers to widen the bid-ask spread and provide a shallower market depth, which in turn reduces liquidity. Liquidity providers realise gains at the expense of liquidity takers, suggesting the emergence of new forms of financial market misconduct. Notably, despite the removal of trading fees, implicit transaction costs increased for customers. This and the boost in the exchange market share raise concerns about price integrity and investors' protection in the highly unregulated crypto environment, in turn implying that the elimination of maker-taker fees is detrimental to the market.

Suggested Citation

  • Galati, Luca, 2023. "Boosting Exchange's Market Share: The Impact of No-Fee Trading on Market Quality," Economics & Statistics Discussion Papers esdp23091, University of Molise, Department of Economics.
    • Handle: RePEc:mol:ecsdps:esdp23091
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    More about this item

    Keywords

    bitcoin market; cryptocurrency exchange; financial market misconduct; liquidity; market microstructure; zero-fee trading;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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