Priority Rules!

44 Pages Posted: 22 Jul 1999

See all articles by James Angel

James Angel

Georgetown University - Department of Finance

Daniel G. Weaver

Rutgers Business School

Date Written: November, 1998


The primary difference between continuous market mechanisms is in the priority rules that they use to match buyers and sellers. In most markets price takes precedence, but if two or more parties are willing to pay the same price, then various markets use different secondary priority rules to break such ties. These rules can have a major impact on the performance of a financial market. We develop a model that examines price and size competition under two different priority rule systems. The model predicts that price/time priority rule systems will foster price competition. The model also predicts that a secondary priority rule of pro-rata sharing provides incentives for size competition. We test these hypotheses on a sample of 402 Toronto Stock Exchange stocks that had their secondary priority rule changed from time to pro-rata sharing. We find results consistent with a decrease in price competition and an increase in size competition, as predicted by the model. We also find that for a sub-sample of 48 stocks that were cross-listed in the U.S., the TSE increased its market share following the rule change. However, this increase was probably due to brokers supporting a rule change for which they had lobbied, rather than order flow migrating to a preferred trading environment.

JEL Classification: G14, G15, G18

Suggested Citation

Angel, James J. and Weaver, Daniel G., Priority Rules! (November, 1998). Available at SSRN: or

James J. Angel

Georgetown University - Department of Finance ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-3765 (Phone)
202-687-4031 (Fax)

Daniel G. Weaver (Contact Author)

Rutgers Business School ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States
848.445.5644 (Phone)
732.445.2333 (Fax)


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