Price-Time Priority, Order Routing, and Trade Execution Costs in NYSE-listed Stocks

Abstract:     
Trade execution costs are lower when market centers use quotations to compete for order flow as compared to when orders are routed to market centers with non-competitive quotes. Execution costs for trades completed off the NYSE when the executing market quote is competitive are virtually the same as for matched trades completed at the NYSE. In contrast, costs for off-NYSE trades competed when executing market quotes are not competitive are 1.1 to 1.6 cents per share worse than for matched NYSE trades.

Quote characteristics, including size, time priority, and proximity to the "inside", significantly affect observed execution venue, indicating a substantial degree of quote-based competition for order flow. However, trade characteristics, including trade size and information content, also affect trade venue. NYSE quotes have or share price priority at either the bid or offer over 99% of the time, and at both the bid and offer 89% of time. NYSE quotes have time priority over 80% of the time. However, an off-NYSE quote virtually always (95.4% of the time) matches the best NYSE quote on at least one side of the market, and occasionally (about 11% of the time) establishes one side of the best quotes without NYSE participation.

Number of Pages in PDF File: 40

Keywords: Trading Costs, Market Fragmentation, Time-Price Priority, Best Execution

JEL Classification: G10, K22

working papers series