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Competition for Order Flow and Smart Order Routing SystemsThierry FoucaultHEC Paris - Finance Department Albert J. MenkveldVU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Duisenberg School of Finance Journal of Finance, Vol. 63, 2008 AFA 2006 Boston Meetings Paper EFA 2005 Moscow Meetings Paper 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.
Number of Pages in PDF File: 47 Keywords: market fragmentation, centralized limit order book, smart routers, trading fees JEL Classification: G10 Accepted Paper SeriesDate posted: June 17, 2008Suggested CitationContact Information
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