Stock exchange race: Competition and fee transformation

Decoding Stock Exchange Fees: Are Lower Costs Worth It?

Reese Marlowe in Business & Economy August 2025 • 4 min read.

"Navigate the complex world of stock exchange fee structures and discover how competition impacts market stability and your investments."

The landscape of equity trading in Europe is undergoing a seismic shift, fueled by two primary forces: intensifying competition among trading venues and the ever-growing influence of technology. This transformation raises critical questions about the quality, efficiency, and accessibility of our equity markets. For investors and market participants, understanding these dynamics is more crucial than ever.

Fiercer competition, largely driven by regulations like the Market in Financial Instruments Directive (MiFID), has spurred the emergence of new trading platforms. These platforms, including multilateral trading facilities (MTFs) and systematic internalisers (SIs), operate alongside traditional, regulated stock exchanges, challenging the established order.

The rise of sophisticated technologies, particularly those used by high-frequency traders (HFTs), adds another layer of complexity. While technology promises increased efficiency and speed, it also introduces concerns about market stability and fairness, particularly in light of events like the 2010 flash crash in the US. This article dives deep into how fee structures have changed amidst this competitive and technological storm.

The Fee Frenzy: Competition and Costs

Stock exchange race: Competition and fee transformation

At the heart of this transformation lies the issue of trading costs. In a healthy market, transaction costs should be low, particularly the often-hidden implicit costs. Liquidity, or the ease with which assets can be bought and sold, is another key indicator of market quality. Fragmentation – the dispersion of trades across multiple platforms – has, in some ways, reduced liquidity on traditional stock exchanges. The million-dollar question is whether this fragmentation, coupled with intense competition, has ultimately improved or worsened overall market quality.

This prompts several critical questions, the most pertinent being: Has competition actually driven down explicit transaction costs, such as execution fees charged by major trading platforms? And if so, what are the consequences for equity markets and the stock exchanges themselves?

Here are key hypotheses to consider:

Are fees lower in markets with greater competition?
Does a decrease of lower fees impact the stock exchanges’ revenue?
Can lower revenues undermine the stability of stock exchanges and their ability to innovate?
Can equity markets invest in technology to avoid outages if profits coming from trading fees are lower?

Transaction costs have long been a subject of academic and industry scrutiny, with studies highlighting the intricate relationship between automation, volatility, liquidity, and overall trading expenses. Breaking down these costs, we find two primary categories: explicit costs, like commissions and fees, and implicit costs, which are harder to quantify but can significantly impact overall expenses. Explicit costs are easily measurable, where implicit costs related to market impact, price trending, timing risk, and opportunity costs are not. The fees charged by broker-dealers for their services, typically calculated in basis points (bps), represent the most important component of explicit costs. Spread cost, which compensates traders for liquidity, is indicative of the liquidity of the security. Considering this dynamic landscape, it's important to consider various factors related to costs.

Navigating the Future of Trading

The drive for efficiency and competitiveness in European equity markets has led to considerable changes in fee structures and trading practices. While increased competition has, in many cases, lowered explicit costs, the long-term implications for market stability, innovation, and accessibility remain a subject of debate. The ongoing evolution of trading technology, regulatory frameworks, and pricing models will continue to shape the landscape, requiring investors and market participants to stay informed and adapt to the ever-changing dynamics of the market. Ultimately, the goal is to create a more transparent, efficient, and resilient equity market that serves the interests of all stakeholders.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.2139/ssrn.2137003, Alternate LINK

Title: The Effects Of Competition On The Fee Structures Of The Main Stock Exchanges

Journal: SSRN Electronic Journal

Publisher: Elsevier BV

Authors: Giusy Chesini

Published: 2012-01-01

Everything You Need To Know

How has the Market in Financial Instruments Directive (MiFID) affected competition among different types of trading platforms, like traditional stock exchanges versus Multilateral Trading Facilities (MTFs) and Systematic Internalisers (SIs)?

The Market in Financial Instruments Directive (MiFID) has significantly influenced trading platforms by fostering competition and the emergence of new venues such as Multilateral Trading Facilities (MTFs) and Systematic Internalisers (SIs). These platforms challenge traditional stock exchanges, altering the dynamics of equity trading in Europe. However, the text does not delve into the specifics of how MiFID impacts the operational rules or oversight of these different trading venues, which is critical for assessing overall market quality and fairness.

How does competition among trading venues impact explicit transaction costs, and what are the potential risks associated with reducing these fees, particularly for stock exchanges?

Competition among trading venues, including traditional stock exchanges, Multilateral Trading Facilities (MTFs), and Systematic Internalisers (SIs), can indeed drive down explicit transaction costs. This reduction in fees can attract more trading volume to these platforms. The document does not explore the potential for a 'race to the bottom,' where exchanges excessively cut fees to gain market share, potentially sacrificing the resources needed for robust infrastructure and regulatory compliance. That is critical for long-term market stability.

In what ways might lower revenues, resulting from reduced trading fees, affect the stability and innovation capabilities of stock exchanges?

Lower revenues resulting from reduced trading fees can potentially undermine the stability of stock exchanges and their capacity for innovation. If profits decrease significantly, exchanges may have less capital to invest in technology upgrades, security measures, and new product development. The relationship between revenue and stability is not fully explored, specifically, how exchanges prioritize different investments and manage their financial reserves to mitigate risks associated with revenue fluctuations.

What role do High-Frequency Traders (HFTs) play in market efficiency and stability, and what specific risks do their technologies pose to the overall market?

High-frequency traders (HFTs) utilize sophisticated technologies that can increase market efficiency and speed. However, this also introduces concerns about market stability and fairness, as highlighted by events like the 2010 flash crash. The material does not offer an in-depth analysis of the specific algorithms or risk management protocols employed by HFTs, nor does it discuss the regulatory mechanisms in place to prevent manipulative or destabilizing trading practices. Understanding these elements is crucial for evaluating the true impact of HFTs on market quality.

What are the key differences between explicit and implicit trading costs, and how do they collectively impact trading expenses?

Explicit costs include commissions and fees charged by broker-dealers, typically measured in basis points (bps), and implicit costs encompass market impact, price trending, timing risk, and opportunity costs. While explicit costs are easily measurable, implicit costs are more challenging to quantify but can significantly affect overall trading expenses. The interplay between explicit and implicit costs and how traders and investors can effectively manage both to optimize their trading strategies is not extensively explained.