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.
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.
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.