Refusing the Best Price?
56 Pages Posted: 16 Feb 2021 Last revised: 17 Sep 2022
Date Written: December 27, 2020
The Regulation National Market System (Reg NMS) links fragmented stock exchanges by routing orders to the National Best Bid and Offer (NBBO). As the NBBO ignores exchange fees, 62% of routings lead to worse net prices. An increase in fee differences increases the market share captured by orders that refuse Reg NMS routings, particularly for stocks whose fees account for a large portion of transaction costs. Heterogeneous opportunity costs rationalize routing choices: non-routable orders entail lower non-execution costs than routable orders. Our results indicate that fees and clientele segmentation drive the proliferation of order types in the Reg NMS era.
Keywords: Regulation NMS, Order Types, Routing, Make/Take Fees, High-Frequency Trading
JEL Classification: G14, G18
Suggested Citation: Suggested Citation