Broker Routing Decisions in Limit Order Markets
42 Pages Posted: 8 Jun 2016 Last revised: 17 Sep 2020
Date Written: July 23, 2018
Many investors rely on brokers to route their orders to exchanges. Exchanges charge fees to the broker who routes the order, rather than to the investor. Brokers have an incentive to route based on the fees, instead of the execution quality experienced by their clients. This conflict of interest reduces welfare, as investor limit orders are sent to exchanges with the lowest fees rather than the best market quality. By limiting exchange fees or passing fees to investors, a regulator can both remove the conflict of interest and improve welfare.
Keywords: brokers, market quality, market microstructure, market fragmentation, make/take fees
JEL Classification: G24, G28
Suggested Citation: Suggested Citation