The Impact of Make-Take Fees on Market Efficiency

Recently, stock exchanges have altered their trading fees to subsidize liquidity by offering “make” rebates for providing liquidity through limit orders and charging “take” fees for consuming liquidity via marketable orders, leading to debate regarding the impact of these fees on market quality. Using an exogenous experiment performed by NASDAQ in 2015, I employ difference-in-differences analysis on a matched sample and find that a decrease in take fee and make rebate levels leads to greater absolute pricing error and larger variance of mispricing, beyond that expected from widened bid-ask spreads, raising concerns for the SEC’s proposed decrease in fee limits.