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Competition for Order Flow and Smart Order Routing Systems

Author

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  • THIERRY FOUCAULT
  • ALBERT J. MENKVELD

Abstract

We study the rivalry between Euronext and the London Stock Exchange (LSE) in the Dutch stock market to test hypotheses about the effect of market fragmentation. As predicted by our theory, the consolidated limit order book is deeper after entry of the LSE. Moreover, cross‐sectionally, we find that a higher trade‐through rate in the entrant market coincides with less liquidity supply in this market. These findings imply that (i) fragmentation of order flow can enhance liquidity supply and (ii) protecting limit orders against trade‐throughs is important.

Suggested Citation

  • Thierry Foucault & Albert J. Menkveld, 2008. "Competition for Order Flow and Smart Order Routing Systems," Journal of Finance, American Finance Association, vol. 63(1), pages 119-158, February.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:1:p:119-158
    DOI: 10.1111/j.1540-6261.2008.01312.x
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    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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