Alternative Trading Systems

Abstract

Using proprietary data, we examine institutional orders and trades filled by alternative electronic trading systems. Our data consist of almost 800,000 orders (corresponding to 2.15 million trades) worth approximately $1.6 trillion, between the first quarter of 1996 and the first quarter of 1998. These data allow us to distinguish between orders filled by external crossing systems, electronic communication networks (ECNs) and traditional brokers. We find that external crossing systems are used largely to execute orders in listed stocks, while ECNs concentrate in Nasdaq stocks. On average, broker-filled orders are larger, have longer duration, and higher fill rates than orders executed by alternative trading systems. Controlling for variation in order characteristics, difficulty, and endogeneity in the choice of trading venue, we find that realized execution costs are substantially lower on external crossing systems and ECNs. Our results shed light on the emergence of alternative electronic trading systems that provide significant competition for order flow, for both exchanges and dealer markets.

JEL Classification: G10, G20