Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality



In recent years most equity trading platforms moved to subsidize the provision of liquidity. Under such a make/take fee structure, submitters of limit orders typically receive a rebate upon execution of their orders, and the exchange covers its costs by charging a higher fee for market orders. Trading rebates have, arguably, been a major facilitator for the emergence of algorithmic trading. We study the impact of this, now prevalent, fee structure on market quality, market efficiency, and trading activity by analyzing the introduction of liquidity rebates on the Toronto Stock Exchange. Using a proprietary dataset, we find that the liquidity rebate structure leads to decreased spreads, increased depth, increased volume, and intensified competition in liquidity provision. Explicitly accounting for exchange fees and rebates, we further find that trading costs for market orders did not decrease and that per share revenues for liquidity providers increase, despite the reduced bid ask spreads and increased competition. Finally, we find no evidence for changes in intermediation or market efficiency.
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Sebastian Gryglewicz                                 Agnieszka Markiewicz
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