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Competition for Order Flow and Smart Order Routing Systems

47 Pages Posted: 17 Jun 2008  

Thierry Foucault

HEC Paris - Finance Department

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

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Abstract

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: https://ssrn.com/abstract=1140795

Thierry Foucault (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Albert J. Menkveld

VU University Amsterdam ( email )

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

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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