Forming an Orderly Line - How Queue-Jumping Drives Excessive Fragmentation

34 Pages Posted: 21 Nov 2019

See all articles by Sean Foley

Sean Foley

University of Sydney Business School

Anqi Liu

The University of Sydney

Elvis Jarnecic

The University of Sydney; Financial Research Network (FIRN)

Date Written: November 10, 2019

Abstract

We identify queue-jumping as a key mechanism that causes markets to fragment. We use the introduction (and partial removal) of the Order Protection Rule, which enforces strict inter-venue price (not time) priority, to observe its impacts on fragmentation. We document that brokers increasingly fragment their liquidity provision activities amongst alternative venues, and liquidity providers attempt to jump long queues on larger venues by increasing submissions to venues with short (or empty) queues, which reduces their adverse selection costs. Our findings help explain the acceleration of fragmentation in markets with trade-through prohibitions as compared to best executions, providing clear policy implications.

Keywords: Fragmentation, Trade-through prohibition

JEL Classification: G10, G20

Suggested Citation

Foley, Sean and Liu, Anqi and Jarnecic, Elvis, Forming an Orderly Line - How Queue-Jumping Drives Excessive Fragmentation (November 10, 2019). Available at SSRN: https://ssrn.com/abstract=3484590 or http://dx.doi.org/10.2139/ssrn.3484590

Sean Foley

University of Sydney Business School ( email )

Sydney
Australia

Anqi Liu (Contact Author)

The University of Sydney ( email )

Business School Abercrombie building
Sydney, NSW 2006
Australia

Elvis Jarnecic

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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