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Author Topic: How do you split fees between buyer and seller on a stock exchange?  (Read 1267 times)
Nefario
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March 22, 2012, 12:27:39 AM
 #1

I don't understand how split fees would work with a stock exchange.

For a currency exchange, both sides of the trade are currencies, and you can take fees from both of them. For example in a BTC and USD trade you can take 0.5% off both, which is fine(neither side pays 1% but thats what you get).

But for a stock exchange, it's not a currency pair but shares and BTC, you can take the fee from the BTC side, but you can't do the same for the share side. As a stock exchange you don't want to be getting shares as payment (because that means you need to liquidate the share anyway) and shares are not divisible.

With bitcoin we can go all the way down to trades of 100 satoishi's before we need to change the code, but often(on GLBSE) single shares are traded, and even larger amounts you can't split into percentages(when there is less than 100 shares).

So how can you split the fee across the buyer/seller on a stock exchange?

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March 22, 2012, 12:45:31 AM
 #2

At the time of the trade, the 1% would be determined and split between both parties.  Trade at 1 BTC, fee is 0.01 BTC and 0.005 is charged to each party.  Buyer buys 1 share for 1 BTC & 1.005 BTC is removed from their trading account.  Seller sells 1 share for 1 BTC and 0.995 BTC is added to their account.  

That would be a 1% fee split between buyer and seller.  EDIT: I would imagine you would round any remainders down to the nearest 0.00001 BTC.

My personal opinion on how trading fees should be handled:
The fee should only be charged to 1 party, but not limited to 1 side of the trade.  The person providing the liquidity should be able to make their trade for free.  For example, if I put up a buy order at .15 and a sell order at .16, but the stock is actively trading at .155, I should not have to pay fees when my orders are eventually filled.  The person who chooses to fill the order (buy at .16 or sell at .15) would pay the fee.  This would encourage more open orders and improve liquidity.  Just placing the fee on one side or the other seems to encourage holding or discourage trading, while free trades for providing liquidity would encourage more people to list orders, thereby encouraging more trading.  It would also allow companies to list their IPO without being victim to double dipping (charging to create the asset and then charging to sell the asset).

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drakahn
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March 22, 2012, 12:47:33 AM
 #3

Couldn't you just take it out of what they receive?

so,
Adam buys 10x stock A for 0.2 each, sends 2btc + fee
Betty sold to Adam and gets 2btc - fee

if fee was 0.5% there is the 1%


edit - as above

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March 22, 2012, 12:57:28 AM
 #4

At the time of the trade, the 1% would be determined and split between both parties.  Trade at 1 BTC, fee is 0.01 BTC and 0.005 is charged to each party.  Buyer buys 1 share for 1 BTC & 1.005 BTC is removed from their trading account.  Seller sells 1 share for 1 BTC and 0.995 BTC is added to their account. 

That would be a 1% fee split between buyer and seller.  Not sure how you would handle the rounding on micro-trades.  This is probably why brokerage houses charge a per trade fee and not a %.

OK, sure, this makes sense


The fee should only be charged to 1 party, but not limited to 1 side of the trade.  The person providing the liquidity should be able to make their trade for free.  For example, if I put up a buy order at .15 and a sell order at .16, but the stock is actively trading at .155, I should not have to pay fees when my orders are eventually filled.  The person who chooses to fill the order (buy at .16 or sell at .15) would pay the fee.  This would encourage more open orders and improve liquidity.  Just placing the fee on one side or the other seems to encourage holding or discourage trading, while free trades for providing liquidity would encourage more people to list orders, thereby encouraging more trading.  It would also allow companies to list their IPO without being victim to double dipping (charging to create the asset and then charging to sell the asset).

I get this, actually yeah this is much better, but more complicated to implement.

Very well, I'll implement this, although not for the initial launch, it will be a little bit after.

For the time being then I'll keep the one sided trade fee (because that's whats there and it works, currently dealing with other issues), but cut it to 0.5%

Thanks for the explanation guys.

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March 22, 2012, 12:59:24 AM
 #5

Couldn't you just take it out of what they receive?

so,
Adam buys 10x stock A for 0.2 each, sends 2btc + fee
Betty sold to Adam and gets 2btc - fee

if fee was 0.5% there is the 1%


edit - as above

This is exactly what Bitfloor does since we charge the fee only on the USD side of the transaction. Basically, you charge the fee however you want and if one side is not a currency, you just charge on the currency side. Technically, you could charge by taking some amount of the shares but this would be strange and not done in practice since you usually don't want to be holding shares Smiley

I also agree that the liquidity provider should not pay a fee, again something we do since the liquidity provider helps other traders by showing their intent to the market.
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March 22, 2012, 01:04:36 AM
 #6

Company(or stock holders) sell shares. You charge the buyer 0.5% more than the stock value and you take 0.5% of the money the seller receives.
It's not rocket science.
You can't take 0.5% of the shares, but you can take 0.5% from the share value.

There. Is that clear enough? Wink

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March 22, 2012, 01:11:33 AM
 #7

Basically I agree with Psy.  Have a hunt around any broker site and you'll see how they do it.

Both buyer and seller normally pay, and that is taken in the operating currency - in this case BTC.

The rate you charge is the tricky issue.  For example, my stock trading I face a $30 + 0.3% fee so anything too small and it is uneconomic.
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March 22, 2012, 01:36:03 AM
 #8

Basically I agree with Psy.  Have a hunt around any broker site and you'll see how they do it.

Both buyer and seller normally pay, and that is taken in the operating currency - in this case BTC.

The rate you charge is the tricky issue.  For example, my stock trading I face a $30 + 0.3% fee so anything too small and it is uneconomic.

Damn. I sould've inserted a disclaimer on my reply saying I was drunk.
But yeah... My girlfriend tells me at least once a week that I only think straight when I'm drunk Cheesy

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March 22, 2012, 05:24:42 AM
 #9

Definitely as OgNasty points out, rebates for liquidity providers (and charges for takers) is becoming more and more common.

Maybe take a look at how Nasdaq does it

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and especially http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2


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March 22, 2012, 09:44:13 AM
 #10

Everybody has explained it already, but basically buyers AND sellers pay fees, you can rebate fees for liquidity makers in v2. v3 may even pay Market Makers more in rebates than they'd pay in fees effectively giving them a revenue stream.

The fees are set in the base currency, in this case BTC as others have said. Stock buyers pay the stock price plus fee. Stock sellers receive BTC less the fee. Stock exchanges work like that. You buy shares you spend $x00 per share plus $y commission. you sell shares you receive $x00 per share less the $y commission.


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March 22, 2012, 09:54:09 AM
 #11

At the time of the trade, the 1% would be determined and split between both parties.  Trade at 1 BTC, fee is 0.01 BTC and 0.005 is charged to each party.  Buyer buys 1 share for 1 BTC & 1.005 BTC is removed from their trading account.  Seller sells 1 share for 1 BTC and 0.995 BTC is added to their account. 
Company(or stock holders) sell shares. You charge the buyer 0.5% more than the stock value and you take 0.5% of the money the seller receives.
I agree.

The fee should only be charged to 1 party, but not limited to 1 side of the trade.  The person providing the liquidity should be able to make their trade for free.  For example, if I put up a buy order at .15 and a sell order at .16, but the stock is actively trading at .155, I should not have to pay fees when my orders are eventually filled.  The person who chooses to fill the order (buy at .16 or sell at .15) would pay the fee.  This would encourage more open orders and improve liquidity.  Just placing the fee on one side or the other seems to encourage holding or discourage trading, while free trades for providing liquidity would encourage more people to list orders, thereby encouraging more trading.  It would also allow companies to list their IPO without being victim to double dipping (charging to create the asset and then charging to sell the asset).

I get this, actually yeah this is much better, but more complicated to implement.

Very well, I'll implement this, although not for the initial launch, it will be a little bit after.
I strongly disagree with this, at least until someone explains how this encourages providing liquidity. Intersango did something like this, I'll quote what I wrote to them:

Quote
To me it seems very poorly thought out, for the simple reason that it will make absolutely no difference. Makers take fees into account when setting prices, and the change will just mean they will modify their prices so that everybody still pays the same.

Before:
John wants to sell 10 BTC, as long as he gets at least $0.9935 for each. He puts a sell order @ $1/BTC.
Beth executes this order, paying $1 per BTC plus 0.65% fee.
John gets $9.935, Beth pays $10.065, Intersango gets $0.13.

After:
John wants to sell 10 BTC, as long as he gets at least $0.9935 for each. He puts a sell order @ $0.997/BTC.
Beth executes this order, paying $0.997 per BTC plus 0.95% fee.
John gets $9.935, Beth pays $10.065, Intersango gets $0.13.

No change in the actual trades and prices people get, this just makes things unintuitive and complicated.

By the way, any plans to have the issuer of the share get a portion of the trading fee?

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March 22, 2012, 11:26:42 AM
 #12

By the way, any plans to have the issuer of the share get a portion of the trading fee?
Why would the primary issuer get a cut of the secondary market?

The issuer get the advantage that a secondary market gives them liquidity. If the issuer gets a cut, then the transaction fees must go up.

If the issuer wants to make a margin they can set up their own secondary market, but I'd never invest in them. I want them to stick to the knitting.


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March 22, 2012, 12:07:53 PM
 #13

By the way, any plans to have the issuer of the share get a portion of the trading fee?
Why would the primary issuer get a cut of the secondary market?

The issuer get the advantage that a secondary market gives them liquidity. If the issuer gets a cut, then the transaction fees must go up.

If the issuer wants to make a margin they can set up their own secondary market, but I'd never invest in them. I want them to stick to the knitting.
I guess you're right, what I had in mind is relevant for some specific use cases (for which there are better solutions) but maybe not in a broader sense.

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March 23, 2012, 12:30:30 AM
 #14

By the way, any plans to have the issuer of the share get a portion of the trading fee?
Why would the primary issuer get a cut of the secondary market?

The issuer get the advantage that a secondary market gives them liquidity. If the issuer gets a cut, then the transaction fees must go up.

If the issuer wants to make a margin they can set up their own secondary market, but I'd never invest in them. I want them to stick to the knitting.
I guess you're right, what I had in mind is relevant for some specific use cases (for which there are better solutions) but maybe not in a broader sense.

Dr. Nefario has previously mentioned that this could be a possibility for future implementations. One application in which it makes sense is Nefario's idea of developing an "exchange in a box". Other exchanges take trading commissions.

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March 23, 2012, 12:41:09 AM
 #15

Pretty much this, the exchange in a box idea.

Essentially if someone wanted to use GLBSE as an exchange, then the issuer, instead of charging a cashout/in fee would earn a portion of the trade fees.

Which would you think would be better? They get trade fees or charge for cashing out/in?

I still plan to go ahead with exchange in a box, I ended up not being able to do so with GLBSE1.0, but I think after a time (maybe after a month) I'll start work on it.

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March 23, 2012, 01:15:31 AM
 #16

I strongly disagree with this, at least until someone explains how this encourages providing liquidity. Intersango did something like this, I'll quote what I wrote to them:

Quote
To me it seems very poorly thought out, for the simple reason that it will make absolutely no difference. Makers take fees into account when setting prices, and the change will just mean they will modify their prices so that everybody still pays the same.

Before:
John wants to sell 10 BTC, as long as he gets at least $0.9935 for each. He puts a sell order @ $1/BTC.
Beth executes this order, paying $1 per BTC plus 0.65% fee.
John gets $9.935, Beth pays $10.065, Intersango gets $0.13.

After:
John wants to sell 10 BTC, as long as he gets at least $0.9935 for each. He puts a sell order @ $0.997/BTC.
Beth executes this order, paying $0.997 per BTC plus 0.95% fee.
John gets $9.935, Beth pays $10.065, Intersango gets $0.13.

No change in the actual trades and prices people get, this just makes things unintuitive and complicated.

By the way, any plans to have the issuer of the share get a portion of the trading fee?

Thats not entirely true, although I'm on your side as I think its pointless, Intersango's new fee structure does make business sense: it delivers on the goal of reducing spreads. Their thinking is a tighter spread will lead to more customers. For those who unknowingly sign up, the buys will be more expensive then they expect. I think this is stupid, however it has made the exchange favour sellers. If you dont mind using two exchanges, you can use this to your advantage for your trading activities.

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March 23, 2012, 02:11:31 AM
 #17

Thats not entirely true, although I'm on your side as I think its pointless, Intersango's new fee structure does make business sense: it delivers on the goal of reducing spreads. Their thinking is a tighter spread will lead to more customers. For those who unknowingly sign up, the buys will be more expensive then they expect. I think this is stupid, however it has made the exchange favour sellers. If you dont mind using two exchanges, you can use this to your advantage for your trading activities.

I think you're being imprecise with your word choices "favor sellers". It actually favors liquidity makers. They can be buyers or sellers, so long as they do not accept the bid/ask on the other side of the transaction.

The new system actually discourages participants from accepting a highest bid/lowest ask. Instead it encourages the order to be off that by 0.00000001 BTC (or whatever the lowest increment the market supports).

Hopefully the market throws a warning like "your commission if you click okay will be 0.095% which is equal to $x.yy <fiat currency>. So the newbies don't get surprised.

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March 23, 2012, 02:46:18 AM
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Thats not entirely true, although I'm on your side as I think its pointless, Intersango's new fee structure does make business sense: it delivers on the goal of reducing spreads. Their thinking is a tighter spread will lead to more customers. For those who unknowingly sign up, the buys will be more expensive then they expect. I think this is stupid, however it has made the exchange favour sellers. If you dont mind using two exchanges, you can use this to your advantage for your trading activities.

I think you're being imprecise with your word choices "favor sellers". It actually favors liquidity makers. They can be buyers or sellers, so long as they do not accept the bid/ask on the other side of the transaction.


I stand corrected. You're right. Intersango favours liquidity makers.

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March 23, 2012, 05:28:36 AM
 #19

Which would you think would be better? They get trade fees or charge for cashing out/in?
There should be an option for both, so they can choose the amount of each type of fee (which could be 0).

Thats not entirely true, although I'm on your side as I think its pointless, Intersango's new fee structure does make business sense: it delivers on the goal of reducing spreads. Their thinking is a tighter spread will lead to more customers. For those who unknowingly sign up, the buys will be more expensive then they expect. I think this is stupid, however it has made the exchange favour sellers. If you dont mind using two exchanges, you can use this to your advantage for your trading activities.
The tighter spread is illusory because what customers gain in the spreads they lose in the fees. For an ordinary customer which just buys or sells and is not a maker, the fee is 0.95%. Intersango may be hoping that the customer will think, "Hm, the fee is sometimes 0.35% and sometimes 0.95%, this is all very confusing, let's say it's 0.65% on average, and the spread is pretty good too, let's join". I am not of the opinion that defrauding your customers should be called "business sense".

The new system actually discourages participants from accepting a highest bid/lowest ask. Instead it encourages the order to be off that by 0.00000001 BTC (or whatever the lowest increment the market supports).
If everyone is informed, there shouldn't be a functional difference from the symmetric system, just the displayed numbers will be different. In the symmetric system you have the same dilemma - if instead of accepting an existing order you place your own order, you stand to gain a more favorable execution price, but you risk the market going in the opposite direction and losing the opportunity to execute.

Hopefully the market throws a warning like "your commission if you click okay will be 0.095% which is equal to $x.yy <fiat currency>. So the newbies don't get surprised.
If you add needless obfuscation people will be more confused, there's no way around that.

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