Fee rebates: why maker-taker and not taker-maker?

D

d0rian

My understanding is that for exchanges that offer liquidity rebates, it's always the MAKER who gets the rebate rather than the TAKER, correct? E.g.:

- XYZ best quotes showing as: $0.50 / $0.60
- I post Buy 10 x $0.55 (midpoint), I'm the Maker (creating potential liquidity)
- Someone crosses the $0.55 / $0.60 spread and hits my Bid, he's the Taker.
- Since I'm the one who created (potential) liquidity, I get the rebate, yes?

I'm curious about how this system came about, since couldn't a compelling argument be made that it's the person who opted to cross the spread (in an effectively gridlocked market) who's the one actually responsible for creating the liquidity? All I did was narrow the spread...he's the one who actually created the liquidity via the execution.

Beyond the mere semantics of who actually "made" the liquidity, is there research showing that this is the optimal fee rebate system to enhance volume? I'd guess very smart people worked out that rewarding the "maker" (me in the example above) is preferable...can anyone point me in the right direction?
 
Liquidity is not defined by the number of trades/executions, but by the number of orders showing on the books.
The number of orders showing in the books affect the number of trades/executions/fills.
Exchanges want books full of orders. They don't want traders to hold their orders and wait for the right condition to send them.

Exchange fees schedule is more an art than a science, and it's probably the element that impact the most how the market share is distributed. And it's why brokers had developed smart routing engines over the years.
 
If there are no makers (that is, if people don't put in book orders) there can be no liquidity at all, since there will be nothing to buy. Thus it would make sense to encourage makers.
 
terr said:
If there are no makers (that is, if people don't put in book orders) there can be no liquidity at all, since there will be nothing to buy. Thus it would make sense to encourage makers.
More...

Sure...though the inverse is equally true: if no one ever crossed a spread, there would be no volume either.

rb7 said:
Liquidity is not defined by the number of trades/executions, but by the number of orders showing on the books.
The number of orders showing in the books affect the number of trades/executions/fills.
Exchanges want books full of orders. They don't want traders to hold their orders and wait for the right condition to send them.
Exchange fees schedule is more an art than a science, and it's probably the element that impact the most how the market share is distributed. And it's why brokers had developed smart routing engines over the years.
More...

This makes sense. As I wrote, I'm sure folks much smarter than me have run the numbers on what will generate the most volume / price discovery and they settled on this instead of the inverse model where spread-crossers would be incentivized with the rebates. As someone who likes understanding things, was hoping there were articles or research papers that might have explored alternative models.
 
d0rian said:
Sure...though the inverse is equally true: if no one ever crossed a spread, there would be no volume either.
More...
True but there would not even be potential for volume if there were no makers. It's like a store - sure there would be no selling volume if there were no customers, but there would definitely not be any if the shelves were empty.
 
d0rian said:
I'm curious about how this system came about, since couldn't a compelling argument be made that it's the person who opted to cross the spread (in an effectively gridlocked market) who's the one actually responsible for creating the liquidity? All I did was narrow the spread...he's the one who actually created the liquidity via the execution.

Beyond the mere semantics of who actually "made" the liquidity, is there research showing that this is the optimal fee rebate system to enhance volume? I'd guess very smart people worked out that rewarding the "maker" (me in the example above) is preferable...can anyone point me in the right direction?
More...

This inverted system to rebate the taker and charge the maker was introduced by Direct Edge (EDGA) over ten years ago. Direct Edge was acquired by Bats in 2014 who was acquired by CBOE in 2016 who CME denies they are acquiring as of 2021. It looks like CBOE is still using the inverted system on orders routed directly to EDGA, 0.003 fee for the maker & 0.0016 rebate for the taker.

https://www.cboe.com/us/equities/membership/fee_schedule/edga/

I have no idea how much volume trades there, but if it would have taken off, I'm sure you would have seen a lot more exchanges offering rebates to takers.

EDIT: Did not realize this was the options thread. The above applies to equities.
 
terr said:
True but there would not even be potential for volume if there were no makers. It's like a store - sure there would be no selling volume if there were no customers, but there would definitely not be any if the shelves were empty.
More...
%%
Good picture+ that's why some auto companies are in trouble \just in time inventory did not work so well. But since, can only fit so much in a warehouse, both make sense.
The above applies to equities+ most anything..........................................................
 
d0rian said:
My understanding is that for exchanges that offer liquidity rebates, it's always the MAKER who gets the rebate rather than the TAKER, correct? E.g.:

- XYZ best quotes showing as: $0.50 / $0.60
- I post Buy 10 x $0.55 (midpoint), I'm the Maker (creating potential liquidity)
- Someone crosses the $0.55 / $0.60 spread and hits my Bid, he's the Taker.
- Since I'm the one who created (potential) liquidity, I get the rebate, yes?

I'm curious about how this system came about, since couldn't a compelling argument be made that it's the person who opted to cross the spread (in an effectively gridlocked market) who's the one actually responsible for creating the liquidity? All I did was narrow the spread...he's the one who actually created the liquidity via the execution.

Beyond the mere semantics of who actually "made" the liquidity, is there research showing that this is the optimal fee rebate system to enhance volume? I'd guess very smart people worked out that rewarding the "maker" (me in the example above) is preferable...can anyone point me in the right direction?
More...
Every time you post a limit order to a public order book, you are providing an option to the market.

As with every option, the seller needs to receive a premium for taking the risk. That's why the maker receives and the taker pays
 
rb7 said:
Liquidity is not defined by the number of trades/executions, but by the number of orders showing on the books.
The number of orders showing in the books affect the number of trades/executions/fills.
Exchanges want books full of orders. They don't want traders to hold their orders and wait for the right condition to send them.

Exchange fees schedule is more an art than a science, and it's probably the element that impact the most how the market share is distributed. And it's why brokers had developed smart routing engines over the years.
More...
%%
Good points, rb7;
but its defined by both. And cant ever cancel [generally speaking,LOL] an execution.
They prefer a somewhat narrow band of orders , day orders anyway.
I dont blame them, a day order too far away from the market could be a big temptation or unlikely event. NOT a prediction , not bank insured + not going to stop reading Dr Suess, some..............................................................
 
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