Does the Prohibition of Trade-Through Hurt Liquidity Demanders?

56 Pages Posted: 24 Jul 2017 Last revised: 14 Aug 2020

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

Department of Industrial Engineering and Decision Analytics, HKUST

Steven Kou

Boston University

Date Written: Aug 14, 2020

Abstract

The Order Protect Rule 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 (i.e. electronic and automated) trading venues. We conduct a counterfactual analysis comparing the order execution costs of a liquidity demander when trade-through is allowed versus prohibited. By deriving upper and lower bounds for the costs, we find that the trade-through benefit is marginal for small trades and stocks with fast resilience. In particular, our study 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? (Aug 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

Department of Industrial Engineering and Decision Analytics, HKUST ( email )

Steven Kou

Boston University ( email )

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

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