Financial Regulation, Clientele Segmentation, and Stock Exchange Order Types

52 Pages Posted: 1 Mar 2021 Last revised: 1 Jun 2022

See all articles by Sida Li

Sida Li

University of Illinois at Urbana-Champaign

Mao Ye

University of Illinois at Urbana-Champaign

Miles Zheng

University of Illinois at Urbana-Champaign - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 2021

Abstract

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%.

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Suggested Citation

Li, Sida and Ye, Mao and Zheng, Miles, Financial Regulation, Clientele Segmentation, and Stock Exchange Order Types (February 2021). NBER Working Paper No. w28515, Available at SSRN: https://ssrn.com/abstract=3795035

Sida Li (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Mao Ye

University of Illinois at Urbana-Champaign ( email )

Miles Zheng

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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