Does maker-taker limit order subsidy improve market outcomes? Quasi-natural experimental evidence

Yiping Lin, Peter Swan and Frederick H.de B. Harris

Journal of Banking & Finance, 2025, vol. 170, issue C

Abstract: We provide a new theory of exchange access fees that explains why fees relatively reduce the probability of execution and increase the limit order queue length on “maker-taker” platforms. Nonetheless, the limit order subsidy greatly improves market depth, together with market efficiency and trading volume. Moreover, fee structures never “wash out” regardless of the minimum tick. The regulatory requirement that trading and order flow depend only on raw (nominal) spreads and prices underpins the multi-billion-dollar subsidy to limit orders. So long as a platform remains competitive, elimination of the fee structure does not alter the raw spread, but it does lower the cum fee spread. We test these implications with a unilateral maker-taker fee/rebate reduction using NASDAQ's “quasi-natural” $1.9 trillion experiment to find support for our theory.

Keywords: Maker-taker fee; Limit order subsidy; RegNMS; Fee pilot; Best execution (search for similar items in EconPapers)
JEL-codes: D01 D82 G12 H21 H25 (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426624002449
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:170:y:2025:i:c:s0378426624002449

DOI: 10.1016/j.jbankfin.2024.107330

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().