The Cost of Routing Orders to High Frequency Traders

62 Pages Posted: 8 Nov 2018

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Brian C. Hatch

University of Cincinnati - Department of Finance - Real Estate

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

Date Written: June 8, 2018

Abstract

Institutional brokers and high-frequency liquidity providers (HFLPs) engage in trading relationships that involve monetary incentives for brokers if they route their clients' orders to HFLPs. This paper examines whether the institutional clients benefit from these routing relationships. We analyze a novel dataset of institutional large-orders whose child-orders can be routed to the HFLPs with investor's consent and find that orders that are routed to HFLPs realize substantially higher trading costs. We obtain causal evidence by utilizing the trades of investors who oppose HFLP routing. The cost increase is due to early information leakage about the investor's liquidity need.

Keywords: High-Frequency Trading, Transaction Costs, Smart Routing

JEL Classification: G12, G14

Suggested Citation

Battalio, Robert H. and Hatch, Brian C. and Saglam, Mehmet, The Cost of Routing Orders to High Frequency Traders (June 8, 2018). Sixth Annual Conference on Financial Market Regulation. Available at SSRN: https://ssrn.com/abstract=3281324 or http://dx.doi.org/10.2139/ssrn.3281324

Robert H. Battalio

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Brian C. Hatch

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner Hall
P.O. Box 210195
Cincinnati, OH 45221
United States
513-556-7076 (Phone)
513-556-0979 (Fax)

Mehmet Saglam (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner College of Business
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)

HOME PAGE: http://homepages.uc.edu/~saglammt/

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