Competition for Order Flow and Smart Order Routing Systems
HEC Paris - Finance Department
Albert J. Menkveld
VU 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
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: G10Accepted Paper Series
Date posted: June 17, 2008
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