Maker-Taker Fees and Liquidity: The Role of Commission Structures

Abstract

Equity exchanges typically subsidize liquidity providers through a rebate, and charge liquidity demanders a fee. We model the impact of this asymmetric fee structure in a setting where some traders pay fees directly to the exchange--a "maker-taker trader"--while others incur a flat fee per trade (e.g., through a broker commission). When the fraction of flat-fee traders is sufficiently small, only the total exchange fee per transaction has an economic impact. If sufficiently many investors face flat commissions, however, trading volume and investor welfare fall, with maker-taker traders assuming a de-facto market-maker role. Moreover, maker-taker traders earn higher average profits.