A Comparison of Execution Quality across U.S. Stock Exchanges

Abstract

The complex and fragmented nature of the U.S. equities exchange landscape has given rise to structural inefficiencies that have created the potential for inherent conflicts of interest between market participants. The introduction of the Investors Exchange, or IEX, offers the unique opportunity to evaluate market quality across exchanges with varying design characteristics and fee structures. As execution quality on a stock exchange cannot be examined independently of equity market structure, we take a holistic approach: we study four dimensions of market quality — liquidity, execution costs, price discovery, and market stability — and within each category we examine structural mechanics responsible for observed disparities in execution quality. We observe a consistent trend in venue stratification by fee structure across a number of market quality metrics: maker-taker exchanges dominate the U.S. equities trading landscape in market share despite greater adverse selection, less stability around executions, significantly longer queues at the inside, and a lower probability of execution. This suggests that access fees and rebates perpetuate economic incentives misaligned with the tenets of best execution, and may promote activity detrimental to market quality. We employ a publicly available dataset (Daily TAQ) in an effort to facilitate replication of our metrics, via which market participants can independently evaluate venue performance.

Keywords: Execution Quality, Market Structure, Stock Exchange, Access Fees, Rebates

JEL Classification: G10, G18