Econometrics and Finance Seminar: Hans Degryse

The Impact of Clearing Fees on Market Quality

Hans Degryse, KU Leuven

This paper aims to provide a more integrated view of market quality by linking the whole value chain in securities transactions: trading and post-trading. We empirically study the impact of post-trade fees, particularly clearing fees, on various dimensions of market quality. As a natural experiment, we use a 25% average reduction by LCH.Clearnet's clearing fees on April 1, 2008. After this fee reduction, we find an improvement of various spread measures (quoted, realized, effective). But while this dimension of liquidity improves, depth decreases by around 14% with respect to average pre-treatment levels, and resiliency (the recovery of liquidity after a shock) deteriorates as well. These results imply that small trades could benefit from the post-trade fee reduction, while larger trades may face higher trading costs. Finally, we find no effect on trading activity and volatility, nor on price impact (adverse selection).