The Effect of Maker-Taker Pricing on Market Liquidity in Electronic Trading Systems – Empirical Evidence from European Equity Trading

European equity trading mainly takes place in electronic order-driven systems. In those systems two groups of traders post their orders. One group makes liquidity by submitting limit orders while the other takes liquidity by submitting market orders. A high degree of liquidity is widely seen as the most important criterion for a market’s quality and efficiency. The introduction of the Markets in Financial Instruments Directive led to the emergence of new trading venues across Europe. Those venues prefer traders making liquidity by the fees they charge in order to improve liquidity and attract market share from established exchanges. This is referred to as maker-taker pricing. Although controversial and not proven if it is advisable for an established exchange to do the same, some exchanges also introduced maker-taker pricing against the background of that new competition. In this paper we will empirically investigate the introduction of maker-taker pricing by the SWX Europe Exchange and its impact on market liquidity by means of an event study methodology. Our findings suggest that maker-taker pricing does not affect spreads, but leads to an increase in the number of shares quoted at the top of the order book.