IDEAS home Printed from https://ideas.repec.org/p/sef/csefwp/490.html
   My bibliography  Save this paper

Market Power on Exchanges: Linking Price Impact to Trading Fees

Author

Listed:
  • Sarah Draus

    () (Rotterdam School of Management, Erasmus University, and CSEF)

Abstract

Recent regulations, aimed at making trading and exchange services more competitive, triggered the proliferation of competing trading venues and resulted in high order flow fragmentation. This paper demonstrates that fragmentation allows liquidity providers and exchanges to retain market power. Whenever exchanges are not completely liquid, a rational trader fragments his order to reduce price impact. This lowers the price elasticity of both liquidity provider’s asset demand and exchange trading volume, inducing mark-ups on transaction prices and on exchange trading fees. Surprisingly, less competitive liquidity provision feeds back into higher trading fees. Moreover, exchanges with better liquidity charge higher trading fees and attract larger market shares. The results are consistent with anecdotal evidence and deliver empirical implications for the effect of introducing exchange competition on implicit and explicit trading costs.

Suggested Citation

  • Sarah Draus, 2012. "Market Power on Exchanges: Linking Price Impact to Trading Fees," CSEF Working Papers 490, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:490
    as

    Download full text from publisher

    File URL: http://www.csef.it/WP/wp490.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Ulf Axelson & Philip Bond, 2015. "Wall Street Occupations," Journal of Finance, American Finance Association, vol. 70(5), pages 1949-1996, October.
    2. Viral Acharya & Marco Pagano & Paolo Volpin, 2016. "Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2565-2599.
    3. Stephen J. Brown, 2001. "Careers and Survival: Competition and Risk in the Hedge Fund and CTA Industry," Journal of Finance, American Finance Association, vol. 56(5), pages 1869-1886, October.
    4. Eckbo, B. Espen & Thorburn, Karin S. & Wang, Wei, 2016. "How costly is corporate bankruptcy for the CEO?," Journal of Financial Economics, Elsevier, vol. 121(1), pages 210-229.
    5. Axelson, Ulf & Bond, Philip, 2015. "Wall Street occupations," LSE Research Online Documents on Economics 37448, London School of Economics and Political Science, LSE Library.
    6. Philip Oreopoulos & Till von Wachter & Andrew Heisz, 2012. "The Short- and Long-Term Career Effects of Graduating in a Recession," American Economic Journal: Applied Economics, American Economic Association, vol. 4(1), pages 1-29, January.
    7. Benmelech, Efraim & Frydman, Carola, 2015. "Military CEOs," Journal of Financial Economics, Elsevier, vol. 117(1), pages 43-59.
    8. Graham, John R. & Harvey, Campbell R. & Puri, Manju, 2013. "Managerial attitudes and corporate actions," Journal of Financial Economics, Elsevier, vol. 109(1), pages 103-121.
    9. Amit Goyal & Sunil Wahal, 2008. "The Selection and Termination of Investment Management Firms by Plan Sponsors," Journal of Finance, American Finance Association, vol. 63(4), pages 1805-1847, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    stock exchanges; competition; order fragmentation; trading fee; liquidity; regulation.;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:490. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lia Ambrosio). General contact details of provider: http://edirc.repec.org/data/cssalit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.