The Cost of Exposing Large Institutional Orders to Electronic Liquidity Providers

68 Pages Posted: 8 Nov 2018 Last revised: 19 Jan 2023

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

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

Battalio, Robert H. and Hatch, Brian C. and Saglam, Mehmet, The Cost of Exposing Large Institutional Orders to Electronic Liquidity Providers (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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