MAKE AND TAKE FEES IN THE U.S.
EQUITY MARKET
LAURA CARDELLA
TEXAS TECH UNIVERSITY JIA HAO
UNIVERSITY OF MICHIGAN IVALINA KALCHEVA
UNIVERSITY OF CALIFORNIA, RIVERSIDE Market Fragmentation, Fragility and Fees
SEPTEMBER 17, 2013
Make and Take Pricing Model
•  Makers
•  Market participants that offer liquidity, i.e., post a non-marketable
order or a quote
•  Pay a Make Fee per share (where a negative fee is a rebate)
•  Takers
•  Market participants who remove liquidity, i.e., submit a
marketable order to initiate a trade
•  Pay a Take Fee per share (where a negative fee is a rebate)
•  Make Fee + Take Fee = Total (Net) Fee
•  if positive provides revenue to the exchange
History and Overview
•  Origination
•  1997 Jeff Citron and Josh Levine, Island ECN
•  Island opened doors in 1996 to begin competing with Nasdaq Stock
Market.
•  Island's market share of reported Nasdaq trades increased from
approximately 3% in 1997 to almost 13% in 1999.
•  Widespread after 2007
•  Predominant model
•  US, Europe
•  Equities, Options
History and Overview
•  Money Transfer
•  Nasdaq Exchange in 2010
•  $1,600 million from take fees
•  - $1,094 million from make fees
•  Net Fee Revenue of $506 million (net income in 2010: $395 million)
Recent Empirical Literature
•  A single-fee-change event
•  Malinova and Park (2014)
•  an introduction of a negative make fee for a sub-sample of stocks on the Toronto Stock
Exchange
•  the liquidity rebate leads to decreased spreads, increased depth, increased volume
•  Skjeltorp, Sojli, and Tham (2013)
•  an increase of the take rebate by 100%, from a cent to two cents per 100 shares on
Boston Stock Exchange and document positive
•  cross-sided liquidity externalities where liquidity demand begets liquidity supply
•  Lutat (2010)
•  a reduction in the fee for making liquidity from positive to free of charge on the SWX
Europe Exchange
•  no effect on spreads, but leads to an increase in the number of shares quoted at the
top of the order book
•  Battalio, Shkilko, and Van Ness (2011); Anand, McCormick, and
Serban (2012); Harris (2013); Battalio, Corwin, and Jennings (2014);
Yao and Ye (2014)
This paper
•  We study the effect of liquidity-based trading fees on
market outcomes (such as trading volume, market share,
and spreads) from the perspective of the exchanges.
•  rather than looking at a single event or looking at the fees from the
perspective of market participants
•  We focus on the benefit to the participants on both side of
the market
This paper (Cont.)
•  We investigate the effects of these fees using daily data
on all fee change events across all registered exchanges
in the U.S. during the period from January 1, 2008 to
December 31, 2010 by means of cross-sectional
exchange-level regression analysis
This Paper (Cont.)
•  Trading activity
•  We explore whether an exchange's trading volume and market
share depend on the exchange's total fee (Colliard and Foucault,
2012; Brolley and Malinova, 2012)
•  We also evaluate whether trading activity is equally sensitive to
changes in make versus take fees (Rochet and Tirole, 2003, 2006;
Foucault, Kadan, and Kandel, 2013)
This Paper (Cont.)
•  Quoted and Net-of-fees spread
•  We explore whether an exchange's dollar and percentage BBO as
well as the dollar and percentage BBO net of fees depend on the
exchange's total fee (Colliard and Foucault, 2012)
•  We also evaluate whether these market outcomes are equally
sensitive to changes in make versus take fees (Rochet and Tirole,
2003, 2006; Foucault, Kadan, and Kandel, 2013)
Further
•  We further investigate the possibility that the effect of
trading fees on market outcomes is more pronounced
when tick size is a binding constraint on the bid-ask
spread
Fee Data from SEC filings
•  Fees for different tapes
•  Tape A: NYSE-listed Securities
•  Tape B: NYSE Arca, Amex, and regionals
•  Tape C: Nasdaq-listed
•  Fees for different tiers
•  Basic
•  Competitive- high liquidity and high volume
Fee Data from SEC filings
•  Fee Variables
•  Nominal Fee- the actual recorded fee
•  Relative-to-Rival Fee- the attractiveness of an exchange’s fees
compared to rival exchanges
Data
•  CRSP data to identify listing exchange
•  TAQ data for measures of trading activity and spread
•  Panel Dataset
•  Measured Daily from 2008-2010
•  Exchange Analysis
•  14 Exchanges
•  Tapes A, B, and C
•  108 make-take fee changes during the sample period
•  Identified from SEC filings
Fees per 100 shares: Jan 2008 – Dec 2010
Raw Fees
Mean
Median
St. Dev
Make
-0.1992
-0.2500
0.1078
Take
0.2490
0.3000
0.1022
Total
0.0498
0.0400
0.0768
Make
-0.2288
-0.2700
0.1137
Take
0.2400
0.2800
0.0993
Total
0.0112
0.0000
0.0647
Basic Tier
Competitive Tier
Money Transfer 2008-2010
•  Upper Bound using basic tier pricing
Take fees: $1.171 million per day
Make fees: - $0.710 million per day
$0.460 million in net revenue on average per day
$116 million on average annually
Money Transfer 2008-2010
•  Upper Bound using basic tier pricing
Take fees: $1.171 million per day
Make fees: - $0.710 million per day
$0.460 million in net revenue on average per day
$116 million on average annually
•  Lower Bound Using Competitive tier pricing
Take fees: $1.124 million per day
Make fees: - $0.992 million per day
$0.132 million in net revenue on average per day
$33 million on average annually
Trading Activity and Spread Variables
•  Volume
•  Vol: number of shares traded in a tape on an exchange
•  Market Share
•  MS: number of shares traded in a tape on the exchange of interest
divided by the sum of shares traded for the same tape traded
across all exchanges.
Trading Activity and Spread Variables
•  Traded Quoted Spread
•  BBO: the median each day across all time-weighted individualsecurity spreads in a tape on an exchange.
•  True Economic Spread
•  Adj BBO: the spread that an investor pays on a round transaction
on an immediate execution calculated as BBO plus twice the take
fee per share.
Results
∆ Detrended Volume ∆ Nominal Total Basic ∆ Detrended Volume -­‐0.235 (0.012) ∆ Nominal Total Compe@@ve -­‐0.223 (0.039) ∆ Detrended Tape Volume 0.081 0.081 (0.000) (0.000) Number of Observa@ons 17,470 17,470 R2 0.4124 0.4123 Regressions include date fixed effects
All variables are in changes
p-values in parentheses
Results
∆ Nominal Make Basic ∆ Nominal Take Basic ∆ Detrended Volume -­‐0.177 (0.066) -­‐0.389 (0.001) ∆ Nominal Make Compe@@ve ∆ Detrended Volume ∆ Detrended Tape Volume 0.081 (0.000) -­‐0.144 (0.198) -­‐0.392 (0.002) 0.081 (0.000) Number of Observa@ons R2 17,470 0.4125 17,470 0.4125 ∆ Nominal Make-­‐ ∆ Nominal Take 0.212 (0.023) 0.249 (0.007) ∆ Nominal Take Compe@@ve Results
∆ $BBO ∆ Nominal Total Basic ∆ $BBO 0.065 (0.811) ∆ Nominal Total Competitive 0.036 (0.668) ∆ Ex Dollar Volume -0.017 -0.017 (0.002) (0.002) 0.193 0.192 (0.000) (0.000) Number of Observations 17,470 17,470 R2 0.1388 0.1388 ∆ Rival Dollar Volume Regressions include date fixed effects
All variables are in changes
p-values in parentheses
Results
∆ Nominal Make Basic ∆ Nominal Take Basic ∆ $BBO 0.066 (0.814) 0.061 (0.854) ∆ Nominal Make Competitive ∆ $BBO -0.017 (0.002) 0.193 (0.000) 0.051 (0.875) 0.003 (0.992) -0.017 (0.002) 0.193 (0.000) Number of Observations R2 17,470 0.1388 17,470 0.1388 ∆ Nominal Make- ∆ Nominal Take 0.004 (0.987) 0.047 (0.859) ∆ Nominal Take Competitive ∆ Ex Dollar Volume ∆ Rival Dollar Volume Economic Magnitude
•  At the average daily volume and average total fee across
our sample, our results show that a reduction by 1 cent
per 100 shares is associated with a 19.04% reduction in
the total revenue per day in a tape on an exchange.
Economic Magnitude
•  At the average daily volume and average make and take
fees across our sample, if the take fee is reduced by 1
cent the exchange' revenue decreases 17.51% in a tape,
while if the make fee is reduced by 1 cent the exchange's
revenue decreases 18.91% in a tape.
Subsample Analysis
•  Below-Median Exchange BBO using Below Median
Security Aggregation Securities
∆ Detrended
Volume ∆ Nominal Total Basic ∆ Detrended
Volume -0.347 (0.013) ∆ Nominal Total Competitive -0.631 (0.001) ∆ Detrended Tape Volume 0.114 0.115 (0.000) (0.000) Number of Observations 8722 8722 R2 0.6471 0.6473 Conclusion
•  Changes in the total fee are inversely related to changes
in volume and market share at the exchange level
•  A decrease in the take fee increases the trading activity
on a tape-exchange more than a decrease in the make
fee
•  Changes in the total fee and changes in the allocation of
the fee are not significantly associated with BBOs or
BBOs adjusted for fees, at least not at the exchange level.