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Competition for order flow and smart order routing systems

Author

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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.

Suggested Citation

  • Foucault, Thierry & Menkveld, Albert, 2006. "Competition for order flow and smart order routing systems," HEC Research Papers Series 831, HEC Paris.
    • Handle: RePEc:ebg:heccah:0831
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    References listed on IDEAS

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    1. Boehmer, Beatrice & Boehmer, Ekkehart, 2003. "Trading your neighbor's ETFs: Competition or fragmentation?," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1667-1703, September.
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    4. 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, vol. 58(6), pages 2637-2666, December.
    5. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
    6. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 103-150.
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    8. Harris, L., 1990. "Liquidity , Trading Rules and Electronic Trading Systems ," Papers 91-8, Southern California - School of Business Administration.
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    13. 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, vol. 58(6), pages 2637-2665, December.
    14. Christine A. Parlour & Duane J. Seppi, 2003. "Liquidity-Based Competition for Order Flow," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 301-343.
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    More about this item

    Keywords

    market fragmentation; centralized limit order book; smart routers; trading fees; trade-throughs;
    All these keywords.

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F18 - International Economics - - Trade - - - Trade and Environment

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