Trading Fees and Efficiency in Limit Order Markets

Jean-Edouard Colliard (1, 2) , Thierry Foucault (3)

1 PSE - Paris School of Economics
2 PSE - Paris-Jourdan Sciences Economiques
3 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

Competition among trading platforms has considerably reduced trading fees in stock markets. We show that this evolution is not necessarily beneficial to investors. Although they increase gains from trade when a trade happens, lower trading costs can induce investors to post limit orders with a smaller execution probability. In this case, gains from trade are realized less frequently and investors can be worse off. Our model has testable implications for the effects of trading fees and their breakdown between liquidity suppliers and liquidity demanders on limit order fill rates and bid-ask spreads.

Mots clés: Government policy

Domaines: Economies et finances

Jean-Edouard Colliard, Thierry Foucault. Trading Fees and Efficiency in Limit Order Markets . The Review of Financial Studies, 2012, 25 (11), pp.3389-3421. ⟨10.1093/rfs/hhs089⟩. ⟨halshs-01510247⟩