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Trading Fees and Efficiency in Limit Order Markets

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  • Jean-Edouard Colliard
  • Thierry Foucault

Abstract

Competition among trading platforms has considerably reduced trading fees in stock markets. We show that this evolution is not necessarily beneficial to investors. Although they increase gains from trade when a trade happens, lower trading costs can induce investors to post limit orders with a smaller execution probability. In this case, gains from trade are realized less frequently and investors can be worse off. Our model has testable implications for the effects of trading fees and their breakdown between liquidity suppliers and liquidity demanders on limit order fill rates and bid-ask spreads. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 25 (2012)
Issue (Month): 11 ()
Pages: 3389-3421

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Handle: RePEc:oup:rfinst:v:25:y:2012:i:11:p:3389-3421

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References

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  1. Foucault, Thierry & Menkveld, Albert, 2006. "Competition for order flow and smart order routing systems," Les Cahiers de Recherche 831, HEC Paris.
  2. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 97-120, Spring.
  3. Estelle Cantillon & Pai-Ling Yin, 2011. "Competition between Exchanges: A research Agenda," ULB Institutional Repository 2013/99386, ULB -- Universite Libre de Bruxelles.
  4. Cantillon, Estelle & Yin, Pai-Ling, 2008. "Competition between Exchanges: Lessons from the Battle of the Bund," CEPR Discussion Papers 6923, C.E.P.R. Discussion Papers.
  5. Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2009. "Liquidity cycles and make/take fees in electronic markets," Les Cahiers de Recherche 920, HEC Paris.
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Cited by:
  1. Hoffmann, Peter, 2012. "A dynamic limit order market with fast and slow traders," MPRA Paper 39855, University Library of Munich, Germany.
  2. Degryse, H.A. & Achter, M. van & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Discussion Paper 2012-001, Tilburg University, Tilburg Law and Economic Center.
  3. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2013. "Competition/fragmentation in equities markets: A literature survey," SAFE Working Paper Series 35, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  4. Hoffmann, Peter, 2012. "A dynamic limit order market with fast and slow traders," MPRA Paper 44621, University Library of Munich, Germany, revised Jan 2013.
  5. Brogaard, Jonathan & Hendershott, Terrence & Riordan, Ryan, 2013. "High frequency trading and price discovery," Working Paper Series 1602, European Central Bank.
  6. Hoffmann, Peter, 2013. "A dynamic limit order market with fast and slow traders," Working Paper Series 1526, European Central Bank.
  7. Hoffmann, Peter, 2014. "A dynamic limit order market with fast and slow traders," Journal of Financial Economics, Elsevier, vol. 113(1), pages 156-169.

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