The Off Exchange Routing Decision

39 Pages Posted: 23 Aug 2019

See all articles by Hyungil Henry Kye

Hyungil Henry Kye

Rutgers University, New Brunswick, Department of Economics

Bruce Mizrach

Rutgers University, Department of Economics

Date Written: August 21, 2019

Abstract

A rising fraction of U.S. equity trading volume is being executed away from the national stock exchanges on the over-the-counter (OTC) market. This paper develops a theoretical model of the decision to route off-exchange to either alternative trading systems (ATS) platforms and OTC non-ATS dealers for executions. Using data from the Financial Industry Regulatory Authority, we compute weekly time series of market shares for all ATS and OTC non-ATS trading centers at the individual stock level in the period of April 4, 2016 - June 30, 2018. We test the model, using a panel-data instrumental variable approach, and confirm that both ATS and OTC non-ATS market shares increase with bid-ask spreads, decrease with on-exchange depth, and decrease with volatility. We extend our model to allow for heterogeneity, grouping venues by the probability of finding off-exchange liquidity. When we estimate our model within trade intensity groups, we find that ATS or OTC non-ATS trading centers respond more elastically to exchange liquidity conditions

Keywords: off-exchange, dealers, over-the-counter; ATS; routing decision

JEL Classification: G10

Suggested Citation

Kye, Hyungil and Mizrach, Bruce, The Off Exchange Routing Decision (August 21, 2019). Available at SSRN: https://ssrn.com/abstract=3440911 or http://dx.doi.org/10.2139/ssrn.3440911

Hyungil Kye

Rutgers University, New Brunswick, Department of Economics ( email )

United States

HOME PAGE: http://henrykye.com

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

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