The Value of a Millisecond: Speed Bumps, Inverted Maker-Taker Fees, Intermarket Competition, and Market Quality

We examine the effects of combining a randomized trading delay (or “speed bump”) with an inverted “taker-maker” fee structure on intermarket competition and market quality.  We find that after instituting both a speed bump and a taker-maker structure, the number of stocks trading on the new TSX Alpha dropped by about a third, but attracted both high frequency trading firms and, notably, uninformed order flow away from other venues.   Despite its modest 8 percent market share, these changes negatively impact liquidity on other Canadian trading venues, but increases profits for liquidity providers on TSX Alpha.  While these changes benefited the stocks and trades executing on the new TSX Alpha, this change increased market-wide costs for liquidity demanders and lowered profits for liquidity suppliers. Interestingly, unlike the fixed speed bump proposed by IEX in the United States to avoid high frequency traders, our results show that there was increased HFT trading on the new TSX Alpha after the change.  Our paper has implications both for the “speed bump” debate, as well as market quality in the United States, where virtually all retail and uninformed order flow is segmented away from lit exchanges.

University of Sidney
Wednesday, June 22, 2016 - 12:00
To be confirmed