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Transaction fees: Impact on institutional order types, commissions, and execution quality

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  • O’Donoghue, Shawn M.

Abstract

Market participants and regulators are debating maker–taker pricing and whether fees split between limit and market orders impact routing and execution quality. Contrary to existing theory, my model predicts this split impacts gains from trade. When rebates increase, liquidity suppliers post more aggressive quotes. Given limit order fill rates, gains from trade fall as commissions increase with fees. Should institutional investors choose market orders with greater probability, fill rates increase and adverse selection decreases. As rebates are realized more frequently, commissions fall, increasing gains from trade in size and frequency. Empirical patterns in SEC Rule 605 confirm my testable predictions.

Suggested Citation

  • O’Donoghue, Shawn M., 2022. "Transaction fees: Impact on institutional order types, commissions, and execution quality," Journal of Financial Markets, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finmar:v:60:y:2022:i:c:s1386418122000118
    DOI: 10.1016/j.finmar.2022.100717
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    More about this item

    Keywords

    Limit order book; Make–take fees; Broker–dealers; Exchange competition; Two-sided markets;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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