The Cost of Exposing Large Institutional Orders to Electronic Liquidity Providers
68 Pages Posted: 8 Nov 2018 Last revised: 19 Jan 2023
Date Written: June 8, 2018
We use a novel data set to examine the impact of exposing institutional orders to electronic liquidity providers (ELPs). We present empirical evidence that marketable pieces of large parent orders are routed to ELPs, seemingly to avoid paying liquidity fees on exchanges. This routing decision results in lower net effective spreads for these child orders, but leads to higher execution shortfall for the parent order. We provide evidence suggestive of a causal relation by utilizing the parent orders of investors who disallow the broker to route their child orders to ELPs. Our analysis suggests ELPs detect the presence of the parent order very quickly given the transparent bilateral relation with the broker.
Keywords: Electronic Liquidity Providers, High Frequency Trading, Institutional Transaction Costs
JEL Classification: G12, G14
Suggested Citation: Suggested Citation