Trading rules, competition for order flow and market fragmentation

A-Tier
Journal: Journal of Financial Economics
Year: 2015
Volume: 115
Issue: 2
Pages: 330-348

Score contribution per author:

1.341 = (α=2.01 / 3 authors) × 2.0x A-tier

α: calibrated so average coauthorship-adjusted count equals average raw count

Abstract

We investigate competition between traditional stock exchanges and new dark trading venues using an important difference in regulatory treatment. Securities and Exchange Commission required minimum pricing increments constrain some stock spreads, causing large limit order queues. Dark pools allow some traders to bypass existing limit order queues with minimal price improvement. Using a regression discontinuity design, we find that spread constraints significantly weaken exchanges׳ competitiveness. As more orders migrate to dark pools, the probability of subsequent order execution there increases, raising liquidity. The ability to circumvent time priority of displayed limit orders is one cause of the rapid rise in US equity market fragmentation.

Technical Details

RePEc Handle
repec:eee:jfinec:v:115:y:2015:i:2:p:330-348
Journal Field
Finance
Author Count
3
Added to Database
2026-01-25