Order Cancellations, Fees, and Execution Quality in U.S. Equity Options

We examine the effects of an order cancellation fee on limit order flow and execution quality in the PHLX options market. The cancellation fee on professional order flow is effective in reducing the rate at which limit orders are canceled. While the cancellation fee discourages the submission of non-marketable orders, it encourages the submission of marketable orders. Consequently, non-marketable order fill rates increase, marketable order fill speeds decrease, and bid-ask spreads widen. We also find slight increases in both dollar volume and market share. We explore whether a change in pick-off risk is a potential explanation for these new findings and policy implications.