Why Discrete Price Fragments U.S. Stock Exchanges and Disperses Their Fee Structures

Competing on Speed

“…Venues can differentiate in areas other than speed. For example, Santos and Scheinkman (2001) studied competition in margin requirements, and Foucault and Parlour (2004) and Chao, Yao, and Ye (2017) studied competition in listing and make-take fees, respectively. These papers consider static frameworks and do not analyze speed differentiation.…”

Why Do Stock Exchanges Compete on Speed, and How?

“…I follow similar notations as in Colliard and Foucault (2012) and Chao, Yao, and Ye (2017) to definef m andf t as maker and taker fee. The total maker taker fee is defined asf =f m +f t > 0.…”

“…Modeling exchanges' maker-taker fee competition is extremely complicated. Chao, Yao, and Ye (2017) has studied this question in a simple one round trading model without adverse selection cost. Even in their simple setup, no pure strategy equilibrium exists and the mixed strategy equilibrium is very complicated because it features two dimensions of the maker-taker fee distribution.…”

Organizational Design, Competition, and Financial Exchanges

“…First, our analysis is closely linked to the market microstructure literature, which aims to explain the market structure of financial exchanges and the co-existence of exchanges. Whereas one strand of this body of literature argues that network effects and economies of scale lead to market concentration (e.g., Biais et al, 2005), another strand explains market fragmentation as being due to regulatory aspects (Chao et al, 2019), or vertical (Foucault, 2012) or horizontal differentiation (Cantillon and Yin, 2010). We model fragmentation by assuming horizontal differentiation between exchanges in order to concentrate on the impact of the value chain in the financial exchange industry on market structure.…”