Financial Regulation, Clientele Segmentation, and Stock Exchange Order Types
51 Pages Posted: 16 Feb 2021 Last revised: 23 Feb 2021
Date Written: December 27, 2020
Financial regulations and clientele segmentation explain the proliferation of order types on stock exchanges. Plain market and limit orders lose money, indicating that informed traders use complex orders. Fifty-seven percent of trading volume comes from non-routable orders, which are designed to bypass Reg NMS. Because Reg NMS routes orders based on the best gross prices, it often routes orders to worse net prices after adjusting for fees. Non-routable orders win speed races to capture short-term profits, but all order types containing long-term information are routable. An order type that complies with share repurchase regulations earns a 30-day return of 7%.
Keywords: Order Types, Regulation NMS, Information, Make/Take Fees, Speed Competition
JEL Classification: G14, G18
Suggested Citation: Suggested Citation