The Allocation of Investors' Orders and Inefficient Market Competition: A Proposal

Harvard Law School, Law and Economics Discussion Paper No. 281

59 Pages Posted: 13 May 2000  

Allen Ferrell

Harvard Law School; European Corporate Governance Institute (ECGI)

Date Written: April 2000

Abstract

An issue that has increasingly occupied the attention of the Securities and Exchange Commission is "payment for order flow." This is the practice whereby securities markets compete for orders placed by brokers by providing side payments to brokers in return for brokers promising to send them investors' orders. Does this create inefficient nonprice competition between securities markets? The paper argues that it does, that all the proposed solutions (including the SEC's disclosure requirements) miss the mark, and that the problem is really a result of the SEC's regulation of the prices at which investors' orders must be filled. Remove this regulatory bar (with a few wrinkles) and the problem would be resolved without the need for the current cumbersome and expensive regulatory apparatus.

JEL Classification: G20, K22

Suggested Citation

Ferrell, Allen, The Allocation of Investors' Orders and Inefficient Market Competition: A Proposal (April 2000). Harvard Law School, Law and Economics Discussion Paper No. 281. Available at SSRN: https://ssrn.com/abstract=224943 or http://dx.doi.org/10.2139/ssrn.224943

Allen Ferrell (Contact Author)

Harvard Law School ( email )

Griswold 303 1525 Massachusetts Avenue
Cambridge, MA 02138
United States
(617) 495-8961 (Phone)
(617) 495-1110 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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