Does the Prohibition of Trade-Through Hurt Liquidity Demanders?

50 Pages Posted: 24 Jul 2017 Last revised: 1 Nov 2021

See all articles by Ningyuan Chen

Ningyuan Chen

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Pin Gao

School of Data Science, The Chinese University of Hong Kong, Shenzhen; Shenzhen Institute of Artificial Intelligence and Robotics for Society

Steven Kou

Boston University

Date Written: August 14, 2020

Abstract

The Order Protect Rule (OPR) in the U.S. generally prohibits any trade-through, i.e., a market order that is not executed at the best possible price among fast (electronic and automated) trading venues. By deriving upper and lower bounds for the difference in the execution costs in a dynamic model, we find that although trade-through allows for flexible trading strategies and may benefit the liquidity demander, the benefit is insignificant in most cases, especially for small trades and stocks with fast resilience. Therefore, considering other benefits of the OPR studied in the literature, this study supports the regulation and suggests that the current separate regulations for fast and slow venues may be extended to differentiate stocks with fast and slow resilience speeds.

Keywords: Optimal order execution, order routing, dynamic programming

Suggested Citation

Chen, Ningyuan and Gao, Pin and Kou, Steven, Does the Prohibition of Trade-Through Hurt Liquidity Demanders? (August 14, 2020). Available at SSRN: https://ssrn.com/abstract=3005835 or http://dx.doi.org/10.2139/ssrn.3005835

Ningyuan Chen (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada

Pin Gao

School of Data Science, The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Institute of Artificial Intelligence and Robotics for Society ( email )

Steven Kou

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
6173583318 (Phone)

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