Informed Trading and Maker-Taker Fees in a Low-Latency Limit Order Market

We model a financial market where privately informed investors trade in a limit order book monitored by professional liquidity providers. Price competition between informed limit order submitters and professional market makers allows us to capture tradeoffs between informed limit and market orders in a methodologically simple way. We apply our model to study maker-taker fees --- a prevalent, but controversial exchange fee system that pays a maker rebate for liquidity provision and levies a taker fee for liquidity removal. When maker-taker fees are passed through to all traders, only the total exchange fee per transaction has an economic impact, consistent with previous literature. However, when investors pay only the average exchange fee through a flat fee per transaction --- as is common practice in the industry --- maker-taker fees have an impact beyond that of a change in the total fee. An increase in the maker rebate lowers trading costs, increases trading volume, improves welfare, but decreases market participation by investors.