Make-Take Structure and Market Quality: Evidence from the U.S. Options Markets

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Abstract
We examine the make-take structure, which compensates liquidity suppliers and charges liquidity demanders, in the options markets where it competes with a traditional structure that uses payments for order flow. Using the introduction of the make-take structure as an event, we find that execution costs (including fees) for liquidity demanders decline after the event for the affected options, that the make-take structure encourages market makers to improve quoted prices, and that brokers change their routing behavior to include fees in the routing decision. The decline in execution costs is consistent with the benefits of the increased quote competition from the make-take structure prevailing over the fees the structure charges to liquidity demanders. This paper was accepted by Wei Jiang, finance.