Building on Yong, Yao, Ye (2018): rebates $\to$ finer tick size

Sophie: V = 20.0325

has the asset

Katya: V = 20.0375

price = 20.04

price = 20.03

Gains from trade $\checkmark$

but: the grid is too wide

Trade @p=20.03,

fee of 0.005 on Katya, rebate 0.005 to Sophie

Trade @p=20.04

fee of 0.005 on Sophie, rebate 0.005 cent to Katya

As if trade @20.035

This paper: investor valuations play a role!

Sophie: V = 20.0325

has the asset

Roberto: V = 25.0375

500 price levels between 20.04 and 25.03 to trade at

No need to rebate anybody for a trade to occur

Trade occurs even for large trading fees

$\to$ exchange rent extraction! 

2-period limit order book, monopolistic exchange

Maker + taker = total exchange fee

Taker fee

Maker fee

Exchange profit

Range of investor valuations

transaction probability

2-period limit order book, social planner

Set the total exchange fee to 0

2-period limit order book: Questions and Comments

• Practical implications of "oscillating" fees?
  • challenging to implement even if valuations are proxied for

3-period model, monopolistic exchange:

barely any oscillations (?)

A step back: why trading fees & "rebates"?

Traditional approach

• Traders:
  • buyers & sellers

• Exchange = service provider
  • facilitates trading
  • collects trading fees
• If anybody gets paid
  • $\to$ "rebate"

A step back: why trading fees & rebates?

An alternate view

• Traders:
  • liquidity suppliers & liquidity demanders

• Service providers = liquidity suppliers
  • must be compensated 
    • inventory costs, adverse selection costs
• $\to$ Liquidity demanders compensate liquidity suppliers
  • bid-ask spread
  • fees