Institutional Order Handling and Broker-Affiliated Trading Venues
50 Pages Posted: 11 Mar 2019 Last revised: 1 Feb 2021
Date Written: January 22, 2021
Using detailed order handling data, we find that institutional brokers who route more orders to affiliated alternative trading systems (ATSs) are associated with lower execution quality (i.e., lower fill rates and higher implementation shortfall costs). To separate clients’ preference for ATSs from brokers’ routing decisions, we confirm these results for orders where brokers have more order handling discretion, matched broker analysis that accounts for ATS usage, matched child orders that account for client intent, and based on an exogenous constraint on ATS venue choice. Our results suggest that increased transparency of order routing practices will improve execution quality.
Keywords: Broker; ATS; Trading Cost; Order Handling; Best Execution
JEL Classification: G10; G20
Suggested Citation: Suggested Citation