How Fee-Based Queue Priority Changes Order Book Trading
Summary
The document considers replacing price-time priority in an exchange order book with priority based on price and a per-share fee. One interpretation is that paying a larger fee effectively lets an order improve its price by a very small amount, resembling a finer tick size. This could allow more price discovery inside the displayed spread and reduce the importance of racing to join the queue first.
The discussion also raises concerns about transparency and market quality. An undisplayed fee would make queue position harder for participants to assess, and the answer argues that opaque priority could discourage liquidity. It also suggests that orders with favorable fee terms might be used in spoofing attempts. These are opinions and conceptual arguments, not empirical findings; the document provides no exchange data or formal model to establish how the proposed rule would affect liquidity, fairness, or revenues.
Key ideas
- A fee that changes queue priority can act like a finer effective price increment.
- Fee-based priority may encourage trading within the displayed spread.
- Hidden fee differences can make order queue positions less transparent.
- The discussion raises possible liquidity and spoofing concerns but provides no empirical test.
Tags
Full text
# Would it be fair an exchange where priority in the order book is the fee paid per share in the order? # Would it be fair an exchange where priority in the order book is the fee paid per share in the order? Instead of matching orders in the order book by price then time, what are the consequences if orders are prioritised by price then fee paid per share in the order? An idea similar to the way transactions are prioritised in blockchain. ## Answer by wildbunny (score 4) https://quant.stackexchange.com/a/45484 I think this would be equivalent to having an infinitesimal tick size, since you could always improve your execution priority by increasing the price you offer. ## Answer by Attack68 (score 3) https://quant.stackexchange.com/a/45476 > Would it be fair? On the one hand, the total price paid for a security is simply the asset price + execution fee, and if one is willing to pay higher than another party then so be it, that's their edge. On the other hand the market is no longer transparent. Exchanges display bids and offers and you place your order with some inherent knowledge about your position in the stack, with much higher clarity (at least) relative to the people coming later than you. When the exchange offers priority for a fee they are introducing a variable to the stack that is unseen. > Is this practical? No, not in my opinion. Exchanges have very specific tick sizes and priority rules (different for differnet products) to encourage an orderly market and good liquidty. Examples can be cited where the Exchange has changed the rules, seen liquidity fall off and then reverted back to their original structure. I suspect having a fee priority structure adds such an awfully opaque feature to the market that it would drive customers away and dwindle its own revenues (which the fees would presumably be trying to increase). Thinking about it if Bitcoin had this type of pricing embedded it might have been supportive of its recent price decline, if its anything like financial market liquidity. I will see if I can look up an old answer on this topic, but also this would make the market more susceptible to spoofing since the spoofer might place a bid (or offer) and together with a zero commission fee, with the expectation that he is sufficiently deficient in the stack and unlikely to trade at all, but still have the order in the book. ## Answer by LazyCat (score 2) https://quant.stackexchange.com/a/45478 Yes, that's fine, though I think, it's better to think in terms of minimal price increments: essentially, you're suggesting to replace 1 cent minimal increment with something much smaller. So, say, an order to buy @ 10.01 with 0.002 fee is the same as an order to buy @ 10.012. This will encourage price discovery within the one cent spread and will make the HFT race to get an order well-placed in the queue unnecessary.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.