Key Differences Found in Liquidity-Based Trading Fees

Wide-ranging study looks at relations between liquidity-based trading fees, trading volume and quoted prices across all stock exchanges in the United States

people walking outside

A. Gary Anderson Hall, home of UC Riverside’s School of Business Administration.

RIVERSIDE, Calif. ( — A fee system that has become a major, and sometimes controversial, source of revenue for stock exchanges in the United States has an impact on trading volume, according to an analysis outlined in a just completed paper by several business school professors. The liquidity-based trading fees have surged in in popularity in the past 10 years.

The paper, co-authored by Ivalina Kalcheva, an assistant professor at the University of California, Riverside School of Business Administration, is believed to be the first empirical study to assess the relations between liquidity-based trading fees, trading volume and quoted prices across all stock exchanges in the United States.

headshot of Ivalina Kalcheva

Ivalina Kalcheva

Liquidity-based trading fees, which have recently drawn the attention of regulators at the Securities and Exchange Commission, are also known as “maker-taker” fee plans. Stock exchanges charge an access fee on orders that “take” liquidity and pay a rebate on orders that “make” liquidity.

This arrangement has been compared to a dance club that offers free entry to women. The club is trying to balance those who stand around the dance floor waiting for others to ask them to dance (i.e. paying a make fee) with those who ask people to dance (i.e. paying a take fee.)

The researchers analyzed data from 2008 to 2010 across all registered stock exchanges in the United States. They found that if an exchange increases its total fee, the sum of the make fee and take fee, by one cent per 100 shares on a given day, its trading volume will decrease 1.3 percent. They estimate the one-cent increase would increase an exchange’s revenue 18.5 percent that day.

They also found that an exchange’s trading volume is not equally sensitive to equal changes in make versus take fees. They found that if the make fee remains constant an increase in the take fee by one cent per 100 shares on a given day decreased trading volume 2.1 percent. However, holding the take fee constant while increasing the make fee by one cent per 100 shares on a given day decreases trading volume .97 percent.

This one-cent increase in the make fee per 100 shares ultimately leads to an exchange revenue increase of 18.9 percent, while the effect of a one-cent increase in the take fee per 100 shares increases revenue by 17.5 percent. Hence, the results suggest an exchange will generate more revenue by increasing its make fee rather that its take fee.

Make and take fees are important sources of revenue for stock exchanges. For example, in 2010 Nasdaq reported $1.6 billion in revenue from take fees, while make fees, or rebates, paid to participants totaled $1.094 billion. In total, Nasdaq generated a net fee revenue of $506 million. To put this in perspective, Nasdaq’s net income in 2010 was $395 million.

In addition to Kalcheva, the paper, “Make and Take Fees in the U.S. Equity Market,” was co-authored by Laura Cardella of Texas Tech University and Jia Hao of the University of Michigan. The paper, which has been presented at a conference, has been submitted to a journal, but has not been published yet.

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