Broker Routing Decisions in Limit Order Markets

42 Pages Posted: 8 Jun 2016 Last revised: 1 Aug 2018

See all articles by David Cimon

David Cimon

Wilfrid Laurier University - School of Business & Economics

Date Written: July 23, 2018

Abstract

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

Cimon, David, Broker Routing Decisions in Limit Order Markets (July 23, 2018). Available at SSRN: https://ssrn.com/abstract=2789804 or http://dx.doi.org/10.2139/ssrn.2789804

David Cimon (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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