Inverted fee structures, tick size, and market quality

Carole Comerton-Forde, Vincent Grégoire and Zhuo Zhong

Journal of Financial Economics, 2019, vol. 134, issue 1, 141-164

Abstract: Stock exchanges compete for order flow through their fee models. A traditional model pays rebates to liquidity suppliers, and an inverted model pays rebates to liquidity demanders. Using a regulatory intervention to examine the interaction between tick size, restrictions on dark trading, and exchange fees, we show that traders use inverted venues to adjust for suboptimal tick sizes. Increased inverted venue activity improves pricing efficiency and liquidity, especially when the tick size is binding. We show that the sub-tick price improvement offered by inverted venues enhances competition for liquidity provision and increases information impounded into prices through nonmarketable limit orders.

Keywords: Exchange fees; Inverted venues; Dark trading (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:134:y:2019:i:1:p:141-164

DOI: 10.1016/j.jfineco.2019.03.005

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