Why discrete price fragments U.S. Stock exchanges and disperses their fee structures

Yong Chao, Chen Yao, Mao Ye

Research output: Contribution to journalArticlepeer-review

Abstract

Stock exchange operators compete for order flow by setting “make” fees for limit orders and “take” fees for market orders. When traders can quote continuous prices, exchange operators compete on total fee, because traders can choose prices that perfectly neutralize any fee division. The 1-cent minimum tick size, however, prevents traders from neutralizing fee division. The nonneutrality of division between make and take fees (1) allows an exchange operator to establish exchanges that differ in fee structure to engage in second-degree price discrimination and (2) destroys the Bertrand equilibrium, leads to frequent fee changes, and encourages entries of new exchanges.

Original languageEnglish (US)
Pages (from-to)1068-1101
Number of pages34
JournalReview of Financial Studies
Volume32
Issue number3
DOIs
StatePublished - Mar 1 2019

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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