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Let's have two exchanges A and B. Exchange A has maker-taker fee structure, while exchange B has taker-maker fee structure. What happens when a broker routes market order to an exchange B at the time when NBBO is at the exchange A? Will the order be automatically routed (when the order type allows routing) to the exchange A and therefore the broker will have to pay the routing fee from exchange B and taker fee from exchange A?

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What happens when a broker routes market order to an exchange B at the time when NBBO is at the exchange A?

Assuming the order was a Buy order, your market order just became the best bid and it is on exchange B. If the best offer was on B, order filled, if not it will route to A (assuming routing allowed).

the broker will have to pay the routing fee from exchange B and taker fee from exchange A?

The fees paid will land in the client account. The broker doesn't pay anything. If you have some sort of flat fee the you pay per trade then the broker absorbs (not pays) the trade fees against the flat (exorbitant) fee you paid the broker. Either way you want to look at it, the client account pays.

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  • $\begingroup$ Thanks for the answer. I am still trying to understand the problem from the perspective of the broker - so if I understand correctly, the resulting P&L of the broker will look like this: - routing fee (to exchange B) , - taker fee (to exchange A), + commision fee (from the client). $\endgroup$ – ragoragino Apr 9 '17 at 17:17
  • $\begingroup$ @ragoragino Correct. Assuming the broker/client commission structure is a flat fee. If it weren't a flat fee, the broker would charge the client a base rate per share (for example, 1 penny per share) and pass all other fees (make/take/route/clearing/etc.) through to the client account. $\endgroup$ – amdopt Apr 9 '17 at 17:29

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