Competition for Order Flow with Fast and Slow Traders

The Review of Financial Studies, 28(7), 2094-2127

51 Pages Posted: 15 Mar 2012 Last revised: 14 Jan 2020

See all articles by Vincent van Kervel

Vincent van Kervel

Pontifical Catholic University of Chile

Date Written: Jan 1, 2015

Abstract

The rise of computerized trading strategies in equity markets has spurred competition between trading venues. This paper shows that cross-venue strategies create highly interlinked markets: trades on one venue are followed by sizeable cancellations of limit orders on competing venues. These cancellations are explained in a simple model of competition between two limit order markets with fast and slow traders. Only the fast traders can access the liquidity of both venues simultaneously. Empirically, we confirm the predictions that the fraction of fast traders (i) reduces the equilibrium liquidity supply and (ii) reduces the magnitude of the cancellations following a trade.

Keywords: Market microstructure, Fragmentation, Market makers, High Frequency Trading

JEL Classification: G10, G14, G15

Suggested Citation

van Kervel, Vincent, Competition for Order Flow with Fast and Slow Traders (Jan 1, 2015). The Review of Financial Studies, 28(7), 2094-2127. Available at SSRN: https://ssrn.com/abstract=2021988 or http://dx.doi.org/10.2139/ssrn.2021988

Vincent Van Kervel (Contact Author)

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, RegiĆ³n Metropolitana 8331150
Chile

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