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Equity trading and the allocation of market data revenue

  • Cecilia Caglio
  • Stewart Mayhew
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    Revenues generated from the sales of consolidated data represent a substantial source of income for U.S. stock exchanges. Until 2007, consolidated data revenue was allocated in proportion to the number of reported trades. This allocation rule encouraged market participants to break up large trades and execute them in multiple pieces. Exchanges devised revenue-sharing and rebate programs that rewarded order-flow providers, and encouraged algorithmic traders to execute strategies involving large numbers of small trades. We provide evidence that data revenue allocation influenced the trading process, by examining trading activity surrounding various events that changed the marginal data revenue per trade.

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    File URL: http://www.federalreserve.gov/pubs/feds/2012/201265/201265pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-65.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgfe:2012-65
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    1. Chakravarty, Sugato, 2001. "Stealth-trading: Which traders' trades move stock prices?," Journal of Financial Economics, Elsevier, vol. 61(2), pages 289-307, August.
    2. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2013. "Liquidity Cycles and Make/Take Fees in Electronic Markets," Post-Print hal-00789263, HAL.
    3. Thierry Foucault & Christine Parlour, 2004. "Competition for Listings," Post-Print hal-00481211, HAL.
    4. Bloomfield, Robert & O'Hara, Maureen, 1998. "Does order preferencing matter?," Journal of Financial Economics, Elsevier, vol. 50(1), pages 3-37, October.
    5. Cecilia Caglio & Andrea Pescatori, 2013. "Competition among Exchanges and Enforcement Policy," IMF Working Papers 13/37, International Monetary Fund.
    6. Tano Santos & Joséa. Scheinkman, 2001. "Competition Among Exchanges," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 1027-1061, August.
    7. Seppi, Duane J, 1990. " Equilibrium Block Trading and Asymmetric Information," Journal of Finance, American Finance Association, vol. 45(1), pages 73-94, March.
    8. Kerry Back & Shmuel Baruch, 2007. "Working Orders in Limit Order Markets and Floor Exchanges," Journal of Finance, American Finance Association, vol. 62(4), pages 1589-1621, 08.
    9. Mark A. Peterson & Erik R. Sirri, 2003. "Order Preferencing and Market Quality on U.S. Equity Exchanges," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 385-415.
    10. Bessembinder, Hendrik, 2003. "Quote-based competition and trade execution costs in NYSE-listed stocks," Journal of Financial Economics, Elsevier, vol. 70(3), pages 385-422, December.
    11. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
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