Trading Fees and Efficiency in Limit Order Markets

Thierry Foucault and Jean-Edouard Colliard

No 8395, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study competition between a dealer (OTC) market and a limit order market. In the limit order market, investors can choose to be "makers" (post limit orders) or "takers" (hit limit orders) whereas in the dealer market they must trade at dealers' quotes. Moreover, in the limit order market, investors pay a trading fee to the operator of this market ("the matchmaker"). We show that an increase in the matchmaker's trading fee can raise investors' ex-ante expected welfare. Actually, it induces makers to post more aggressive offers and thereby it raises the likelihood of a direct trade between investors. For this reason as well, a reduction in the matchmaker's trading fee can counter-intuitively raise the OTC market share. However, entry of a new matchmaker results in an improvement in investors' welfare, despite its negative effect on trading fees. The model has testable implications for the effects of a change in trading fees and their breakdown between makers and takers on various measures of market liquidity.

Keywords: Inter-market competition; Limit order markets; Liquidity; Make/take fees; Otc markets; Trading fees (search for similar items in EconPapers)
JEL-codes: G00 G18 G20 L10 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://cepr.org/publications/DP8395 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Trading Fees and Efficiency in Limit Order Markets (2012)
Working Paper: Trading Fees and Efficiency in Limit Order Markets (2012)
Working Paper: Trading Fees and Efficiency in Limit Order Markets (2012)
Working Paper: Trading fees and efficiency in limit order markets (2012)
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:cpr:ceprdp:8395

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8395

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().