Market structure and price clustering: Maker‐taker versus taker‐maker

Abstract

AbstractWe examine whether the different fee structures on equity exchanges, maker‐taker or taker‐maker, affects the frequency with which security prices cluster on round increments. We find higher price clustering on traditional maker‐taker venues relative to inverted taker‐maker venues. These results generally hold at the individual exchange level and across transaction‐ and quotation‐level clustering measures. Furthermore, we document that quoted depth, both inside and outside the best prices, is significantly greater on maker‐taker venues than on taker‐maker venues. We show that liquidity supply is the main economic driver behind the difference in price clustering between market structures. Our findings indicate that fees and rebates alter order‐routing strategies, which affect the precision of asset prices.