Priority Rules

66 Pages Posted: 4 Dec 2019

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Nikolaos Karagiannis

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: November 2019

Abstract

While regulators often mandate price priority across markets, they do not impose secondary priority rules. Order preferencing by a broker to a specific market may then serve as tiebreaker. We compare order preferencing, modeled as price-broker-time priority (PBT), to price-time priority (PT). The secondary priority rule determines a limit order's execution probability, and hence investors' choice between limit and market orders. When the tick is tight relative to the dispersion in investors' valuations, trading rates are higher with PBT whereas investor welfare is higher with PT. The opposite holds for wide ticks. Our model has empirical and regulatory implications regarding market fragmentation.

Keywords: market fragmentation, priority rules, queuing, welfare

Suggested Citation

Degryse, Hans and Karagiannis, Nikolaos, Priority Rules (November 2019). CEPR Discussion Paper No. DP14127. Available at SSRN: https://ssrn.com/abstract=3496616

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Nikolaos Karagiannis

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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