Competition for Order Flow and Smart Order Routing Systems

47 Pages Posted: 17 Jun 2008

See all articles by Thierry Foucault

Thierry Foucault

HEC Paris - Finance Department

Albert J. Menkveld

Vrije Universiteit Amsterdam

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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

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:

Thierry Foucault (Contact Author)

HEC Paris - Finance Department ( email )

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Albert J. Menkveld

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

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