The Impact of Arbitrage Between Stock Markets With and Without Maker–Taker Fees Using an Agent-Based Simulation

Abstract

An increasing number of exchanges, mainly in the U.S., have adopted a commission structure called maker–taker fees in which traders placing limit orders (makers) are paid a rebate (negative trading commission) and traders placing market orders (takers) are charged a trading fee. The reason is that by paying rebates to makers, exchanges can expect to receive a large number of maker’s orders and gain market share. Makers include arbitrageurs who make large transactions. Maker–taker fees constitute one of the most important commission structures for exchanges, because they are expected to attract arbitrageurs who are looking for rebate profits, on top of their trading profits. There have been many studies about arbitrage trading, but none we could find focused on the impact of arbitrage trading between markets with maker–taker fees where arbitrage traders place limit orders and markets without maker–taker fees where they place market orders. In this study, we investigated volatility and market liquidity by changing the amount of rebate under our proposed artificial markets, where there are or are not maker–taker fees. Then we checked the performance of arbitrage trading when the rebate increased. The results were that volatility in the market with maker–taker fees decreased and that in the market without maker–taker fees increased, and that market liquidity and arbitrage performance both increased in the market with maker–taker fees when rebates increased. The above results indicate that exchanges that operate markets adopting maker–taker fees can provide investors with more attractive markets than those that do not adopt them. However, if more arbitrageurs participate in the market with maker–taker fees to take advantage of these rebates, the cost burden on exchanges may increase unnecessarily.