Intuitively, I feel that, for a given stock traded on 2 exchanges with different price structure (i.e., exchange A is maker-taker, exchange B is taker-maker), the spread should be wider on exchange B (taker-maker) as liquidity providers expect to make the same amount, after fees, on both exchanges. 1. Could someone please confirm, or deny? 2. If this is not true, could you please explain why? Many thanks!
From what I have read, maker-taker payments attract people interested in the rebates. Who could that be? Brokers. That conflict of interest tends to result in poorer customer fills. To me, that implies that the maker-taker arrangement has wider spreads.
"Informed Trading and Maker-Taker Fees in a Low-Latency Limit Order Market" by Brolley and Malinova (2013) not only supports your hypothesis, it sugests rebate fees improve welfare. From the paper:
Changes in exogenous market factors (e.g., a trading platform’s fee structure) lead to changes in the marginal valuations that investors require to submit market or limit orders, and subsequently, to changes in liquidity, trading volume, and market participation by investors. When investors pay a ﬂat fee in a maker-taker pricing environment, ceteris paribus, an increase in a maker rebate lowers the bid-ask spread and induces investors previously indiﬀerent to market and limit orders to trade with market orders (since an investor’s trading costs consists, loosely, of the bid-ask spread and the ﬂat fee levied by their broker). Consequently, the probability of a market order submission increases, and so does the trading volume. This would lead to brokers paying taker fees more frequently and consequently charging investors a higher ﬂat fee. We support this intuition numerically and ﬁnd further that the increase in the ﬂat fee is more than oﬀset by the decline in the bid-ask spread. For a ﬁxed total exchange fee, investors’ overall trading costs thus decline with an increase in the maker rebate. The marginal submitter of a market order then requires weaker information, and the price impact of a trade declines.
Displayed Spreads on Maker/Taker exchanges are typically narrower than spreads on Taker/Maker or other exchanges.
The reason is simple, participants (assuming they pay the exchange transaction fee or get the exchange rebate) would prefer to post their limit orders on a platform that costs the least. As a result, they display them on an exchange that they can access that has the highest likelihood of execution and the highest rebate.
This is often confused with Payment for Order Flow, which is where a market maker on a given exchange pays an order flow provider or consolidator for sending the order to them. This encourages the Market Maker or Specialist to offer a less competitive price (e.g. matching rather than improving upon the National Best Bid or Offer).
Some retail brokers offer 'flat rate' transaction fees (e.g. $7 per trade) so the customer does not benefit from the rebates (or payment for order flow), whereas other offer other models such as 'cost plus' where the transaction fee is lower, but the customer also pays the exchange fees or receives the rebate.