Once Upon a Broker Time? Order Preferencing and Market Quality

65 Pages Posted: 29 May 2018

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Nikolaos Karagiannis

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: October 1, 2017

Abstract

We develop a dynamic, infinite horizon, microstructure model to study how priority rules determine market quality and investor welfare. We compare order preferencing, modeled as price-broker-time priority (PBT), to price-time priority (PT). Priority rules impact investors’ choice between limit and market orders. When the tick is tight, trading rates are higher with PBT whereas investor welfare is higher with PT. The opposite holds for a wide tick. PBT endogenously results when brokers individually choose between PT or PBT. Our model has testable implications regarding systematic patterns in order flow, market depth, trade composition, and market fragmentation.

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

JEL Classification: G00, G10, G11, G18

Suggested Citation

Degryse, Hans and Karagiannis, Nikolaos, Once Upon a Broker Time? Order Preferencing and Market Quality (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=3186009 or http://dx.doi.org/10.2139/ssrn.3186009

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Nikolaos Karagiannis

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

Naamsestraat 69
Leuven, B-3000
Belgium

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