Broker Colocation and the Execution Costs of Customer and Proprietary Orders

83 Pages Posted: 30 Nov 2022 Last revised: 14 Dec 2022

See all articles by Satchit Sagade

Satchit Sagade

Nasdaq, Inc.; Leibniz Institute for Financial Research SAFE

Stefan Scharnowski

University of Mannheim

Christian Westheide

University of Vienna - Department of Finance

Date Written: December 13, 2022

Abstract

Colocation services offered by stock exchanges enable market participants to achieve execution costs for large orders that are substantially lower and less sensitive to transacting against high-frequency traders. However, these benefits manifest only for orders executed on the colocated brokers' own behalf, whereas customers' order execution costs are substantially higher. Analyses of individual order executions indicate that customer orders originating from colocated brokers are less actively monitored and achieve inferior execution quality. This suggests that brokers do not make effective use of their technology, possibly due to agency frictions or poor algorithm selection and parameter choice by customers.

Keywords: Execution Cost, Institutional Investor, Broker, High-Frequency Trading, Colocation

JEL Classification: G10, G14, G15

Suggested Citation

Sagade, Satchit and Scharnowski, Stefan and Westheide, Christian, Broker Colocation and the Execution Costs of Customer and Proprietary Orders (December 13, 2022). SAFE Working Paper No. 366, Available at SSRN: https://ssrn.com/abstract=4289346 or http://dx.doi.org/10.2139/ssrn.4289346

Satchit Sagade

Nasdaq, Inc. ( email )

Tullvaktsvägen 15
Stockholm, Stockholm 105 78
Sweden
+4684057967 (Phone)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 176 72222 049 (Phone)

Stefan Scharnowski

University of Mannheim ( email )

Mannheim, 68161
Germany

Christian Westheide (Contact Author)

University of Vienna - Department of Finance ( email )

Bruennerstrasse 72
Vienna, 1210
Austria

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