Optimal Market Asset Pricing

Roberto Riccó, Barbara Rindi and Duane J. Seppi

No 675, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We determine optimal market access pricing for an exchange or Social Planner. Exchanges optimally use rebate-based pricing (vs. strictly positive fees) when ex ante gains-from-trade and trading activity are low (high). Exchange rebate-based pricing increases (decreases) welfare when investor valuation dispersion and trading activity are low (high). A Social Planner increases welfare using rebate-based pricing. High-frequency traders strengthen exchange incentives for rebate-based pricing; a new explanation for widespread Maker-Taker and Taker-Maker pricing. With HFTs, rebate-based pricing improves total welfare, but Pareto transfers are needed to improve investor welfare. Sequential bargaining games between competing exchanges setting fees have pure-strategy equilibria. JEL classification: G10, G20, G24, D40 Keywords: Market access fees, make-take, limit order markets, liquidity, market microstructure

Date: 2021
New Economics Papers: this item is included in nep-mst
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