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

Luca Galati

Economics & Statistics Discussion Papers from University of Molise, Department of Economics

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.

Keywords: bitcoin market; cryptocurrency exchange; financial market misconduct; liquidity; market microstructure; zero-fee trading (search for similar items in EconPapers)
JEL-codes: C58 D47 D82 G14 G18 (search for similar items in EconPapers)
Pages: 57
Date: 2023-10-19
New Economics Papers: this item is included in nep-mst and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:mol:ecsdps:esdp23091

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