Priority Rules

68 Pages Posted: 29 May 2018 Last revised: 1 Aug 2022

See all articles by Hans Degryse

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB)

Nikolaos Karagiannis

The University of Manchester - Alliance Manchester Business School; KU Leuven - Faculty of Business and Economics (FEB)

Date Written: August 1, 2022

Abstract

Should regulators mandate priority rules in trading? While regulators often require price priority, they do not mandate secondary priority rules. We compare two well-established priority rules (i.e., price-broker-time priority (PBT) and price-time priority (PT)) in a market with a price grid. The applied priority rule determines limit order’s execution probability, and hence investors’ choice between limit and market orders. When the tick is tight relative to investors’ dispersion in valuations, trading rates are higher with PBT relative to PT whereas the opposite holds for wide ticks. The social optimum prescribes PT when the tick is small but PBT for wide ticks. Our model has empirical and regulatory implications regarding market fragmentation.

Keywords: Limit order markets, Trading Protocols, Time Priority, Welfare

JEL Classification: G00, G10, G11, G18

Suggested Citation

Degryse, Hans and Karagiannis, Nikolaos, Priority Rules (August 1, 2022). Available at SSRN: https://ssrn.com/abstract=3186009 or http://dx.doi.org/10.2139/ssrn.3186009

Hans Degryse (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Nikolaos Karagiannis

The University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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