Priority Rules

Degryse, Hans; Karagiannis, Nikolaos

doi:10.2139/ssrn.3186009

Priority Rules

65 Pages Posted: 29 May 2018 Last revised: 10 Dec 2020

See all articles by Hans Degryse

Hans Degryse

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

Nikolaos Karagiannis

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

Date Written: October 1, 2017

Abstract

While regulators often mandate price priority across markets, they do not impose
secondary priority rules. Order preferencing by a broker to a speciﬁc market may then
serve as tiebreaker. We compare order preferencing, modeled as price-broker-time priority (PBT), to price-time priority (PT). The secondary priority rule determines a limit
order’s execution probability, and hence investors’ choice between limit and market orders. When the tick is tight relative to the dispersion in investors’ valuations, trading
rates are higher with PBT whereas investor welfare is higher with PT. The opposite
holds 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: Suggested Citation

Degryse, Hans and Karagiannis, Nikolaos, Priority Rules (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=3186009 or http://dx.doi.org/10.2139/ssrn.3186009