Liquidity provider incentives in fragmented securities markets

Abstract We test theoretical predictions of changes in make/take fees in a setting with isolated make rebates for liquidity providers on a single trading venue (Xetra) by examining the impact on both Xetra and the overall market. The rebates lead to higher quoted depth but do not change bid–ask spreads or trading volume on Xetra. For the overall market, no change in trading volume or liquidity is observable. This shows that market participants redistribute their orders to the venue offering fee rebates rather than providing additional liquidity to the overall market. Consequently, the impact of fee changes depends on the setting.