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Competition for order flow and smart order routing systems

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  • Foucault, Thierry

    ()

  • Menkveld, Albert

    ()

Abstract

In this paper, the authors study the changes in liquidity following the introduction of a new electronic limit order market when, prior to its introduction, trading is centralized in a single limit order market. They also study how automation of routing decisions and trading fees affect the relative liquidity of rival markets.

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Bibliographic Info

Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 831.

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Length: 61 pages
Date of creation: 01 Jan 2006
Date of revision:
Handle: RePEc:ebg:heccah:0831

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Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/
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Related research

Keywords: market fragmentation; centralized limit order book; smart routers; trading fees; trade-throughs;

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References

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  1. Fink, Jason & Fink, Kristin E. & Weston, James P., 2006. "Competition on the Nasdaq and the growth of electronic communication networks," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(9), pages 2537-2559, September.
  2. Mendelson, Haim, 1987. "Consolidation, Fragmentation, and Market Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 22(02), pages 189-207, June.
  3. Battalio, Robert H, 1997. " Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 341-52, March.
  4. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
  5. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(1), pages 103-50.
  6. Pagano, Marco, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 255-74, May.
  7. Biais, Bruno & Martimort, David & Rochet, Jean-Charles, 1998. "Competing Mechanisms in a Commun Value Environment," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 75, Institut d'Économie Industrielle (IDEI), Toulouse.
  8. Chowdhry, Bhagwan & Nanda, Vikram, 1991. "Multimarket Trading and Market Liquidity," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(3), pages 483-511.
  9. Bessembinder, Hendrik, 2003. "Quote-based competition and trade execution costs in NYSE-listed stocks," Journal of Financial Economics, Elsevier, Elsevier, vol. 70(3), pages 385-422, December.
  10. Stewart Mayhew, 2002. "Competition, Market Structure, and Bid-Ask Spreads in Stock Option Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 931-958, 04.
  11. Dybvig, Philip H. & Spatt, Chester S., 1983. "Adoption externalities as public goods," Journal of Public Economics, Elsevier, Elsevier, vol. 20(2), pages 231-247, March.
  12. Michael J. Barclay & Terrence Hendershott & D. Timothy McCormick, 2003. "Competition among Trading Venues: Information and Trading on Electronic Communications Networks," Journal of Finance, American Finance Association, American Finance Association, vol. 58(6), pages 2637-2666, December.
  13. Harris, L., 1990. "Liquidity , Trading Rules and Electronic Trading Systems ," Papers, Southern California - School of Business Administration 91-8, Southern California - School of Business Administration.
  14. Boehmer, Beatrice & Boehmer, Ekkehart, 2003. "Trading your neighbor's ETFs: Competition or fragmentation?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(9), pages 1667-1703, September.
  15. Hendershott, Terrence & Jones, Charles M., 2005. "Trade-through prohibitions and market quality," Journal of Financial Markets, Elsevier, Elsevier, vol. 8(1), pages 1-23, February.
  16. Terrence Hendershott & Charles M. Jones, 2005. "Island Goes Dark: Transparency, Fragmentation, and Regulation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(3), pages 743-793.
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