In my two years at Chapman’s Economic Science Institute, I had the opportunity to work on a variety of cutting edge research in experimental economics and market design. These projects included experiments on endogenous liquidity creation modeled on the bitcoin cryptocurrency, pilot experiments designed to develop a market mechanism enabling residents to trade excess water capacity, and a variety of computational projects such as a genetic algorithm designed to solve for the Nash equilibrium of a two-player bimatrix game.
The project that eventually became my thesis was an experimental investigation of the effects of the make and take fee structure used by equity exchanges on measures of market quality. The make and take fee structure has been the prevailing mechanism used by equity exchanges since the mid 2000s. In short, market participants who add liquidity to an exchange by submitting limit orders receive a rebate from the exchange upon order execution, while participants who remove liquidity from an exchange by submitting market orders are assessed a fee from the exchange upon execution.
We used a double auction environment to simulate a single stock exchange. We looked at the effects of exogenously imposing the fee structure on four measures of market quality.
- efficiency: how much economic surplus subjects are able to extract from the market
- book depth: the number of unique bids and asks on the order book at a given time
- bid-ask spread: the difference between the highest ask and lowest bid
- trading volume: the amount of trading that occurs in a market trading period
Our experiments showed that the only statistically significant relationship between the presence of make & take fees and our measures of market quality was an increase in book depth. There are a number of possible extensions to the model that I will be pursuing in the upcoming months.
I successfully defended my thesis at ESI’s weekly brownbag lecture series in early May. I was also able to present my work to a couple of Chapman’s upper division finance courses. Most excitingly, my work has been accepted for presentation at the upcoming Experimental Finance 2015 conference in Amsterdam.