A standard presumption of market microstructure models is that competition between riskneutral market makers inevitably leads to price schedules that leave market makers zero expected profits conditional on the order flow. This article documents an important lack of robustness of this zero-profit result. In particular, we show that if traders can split orders between market makers, then market makers set less-competitive price schedules that earn them strictly positive profits and hence raise

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... ading costs. Thus, this article can explain why somebody might willingly make a market for a stock when there are fixed costs to doing so. The analysis extends to a limit order book, which by its nature is split against incoming market orders: equilibrium limit order schedules necessarily yield those agents positive expected profits. A standard presumption in market microstructure [see, e.g., Easley and O'Hara (1987), Glosten and Milgrom (1985) , Kyle (1985) ] is that competition between riskneutral market makers inevitably leads to price schedules that leave market makers zero expected profits The first author is grateful to the SSHRC for financial support. Part of this work was completed when both authors were at the California Institute of Technology and part when the second author was visiting the University of British Columbia. We thank