Fee-Based Competition between Trading Venues

Project Start:07/2018
Researchers:Benjamin Clapham, Peter Gomber, Olga Klein, Jens Lausen, Sven Panz, Satchit Sagade, Christian Westheide, Christian Wilde
Category: Financial Markets
Funded by:LOEWE

Trading venues employ a variety of incentive schemes in order to compete with each other for order flow. Among the most important of them are the fee structures. Since the introduction of the Markets in Financial Instruments Directive (MiFID I), incumbent and new trading venues in Europe have attempted to calibrate their fee structures in order to effectively compete with each other.


Examples of such changes are the introduction of a maker-taker pricing scheme by the London Stock Exchange (LSE) on 1 September 2008 and its subsequent withdrawal on 1 September 2009. In maker-taker pricing schemes liquidity providing orders are given cash incentives and liquidity consuming orders are charged a fee. Other examples are volume-based fee schedules employed by LSE and Deutsche Beteiligungs AG (DBAG) – in such schemes, each member is charged a fee dependent on their trading volume routed to the venue.


In the project, we examine the impact of such changes on different aspects of market quality. These fee structures influence brokers’ order routing decisions. Moreover, structures such as maker-taker pricing have been controversial as sometimes brokers do not pass the rebates to their customers.


Studies such as Colliard and Foucault (2012) and Malinova and Park (2015) have found that liquidity providers adjust their posted quotes after introducing a maker-taker scheme and cum-fee transaction costs remain unchanged.


We examine the liquidity provider program introduced by Deutsche Börse in October 2016. In order to assess the effects of the liquidity provider program, we analyze both the perspective of the market introducing the program as well as the perspective of market participants interested in consolidated liquidity since they can access different liquidity pools.


Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
231Benjamin Clapham, Peter Gomber, Jens Lausen, Sven PanzLiquidity Provider Incentives in Fragmented Securities Markets2018 Financial Markets Liquidity, Trading Volume, Market Fragmentation, Liquidity Provider Incentives, Transaction Costs