47 Pages Posted: 17 Jun 2008
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.
Keywords: market fragmentation, centralized limit order book, smart routers, trading fees
JEL Classification: G10
Suggested Citation: Suggested Citation
Foucault, Thierry and Menkveld, Albert J., Competition for Order Flow and Smart Order Routing Systems. Journal of Finance, Vol. 63, 2008; AFA 2006 Boston Meetings Paper; EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1140795
By Lin Tong