Who Uses Which Order Type and Why?
47 Pages Posted:
Date Written: December 27, 2020
Clientele effects explain the proliferation of order types on U.S. stock exchanges. Market and plain limit orders lose money, indicating that informed traders use more complex orders. The most complex order types refuse to trade with the national best bid and offer (NBBO) if the NBBO appears on another exchange. Fees provide one explanation for non-routable orders because Reg NMS might route orders to worse prices after adjusting for routing fees. Non-routable orders also win speed races to capture quick profits and contain short-term information. However, all order types containing long-term information are routable and often tailored to corporate events.
Keywords: Order Types, Regulation NMS, Information, Make/take fees, Speed Competition
JEL Classification: G10, G20
Suggested Citation: Suggested Citation