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Trading Fees and Efficiency in Limit Order Markets

  • Jean-Edouard Colliard
  • Thierry Foucault

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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File URL: http://hdl.handle.net/10.1093/rfs/hhs089
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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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  1. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. 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.
  3. Foucault, Thierry & Menkveld, Albert J., 2006. "Competition for Order Flow and Smart Order Routing Systems," CEPR Discussion Papers 5523, C.E.P.R. Discussion Papers.
  4. Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2009. "Liquidity cycles and make/take fees in electronic markets," Les Cahiers de Recherche 920, HEC Paris.
  5. Estelle Cantillon & Pai-Ling Yin, 2011. "Competition between Exchanges: A research Agenda," ULB Institutional Repository 2013/99386, ULB -- Universite Libre de Bruxelles.
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