Would Order-by-Order Auctions Be Competitive?

70 Pages Posted: 23 Dec 2022 Last revised: 11 Mar 2024

See all articles by Thomas Ernst

Thomas Ernst

University of Maryland - Robert H Smith School of Business

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Jian Sun

Lee Kong Chian School of Business, Singapore Management University

Date Written: December 13, 2022

Abstract

We model two methods of executing segregated retail orders: broker's routing, whereby brokers allocate orders using market maker's overall performance, and order-by-order auctions, where market makers bid on individual orders, a recent SEC proposal. Order-by-order auctions improve allocative efficiency, but face a winner's curse reducing retail investor welfare, particularly when liquidity is limited. Additional market participants competing for retail orders fail to improve total efficiency and investor welfare when entrants possess information superior to incumbent wholesalers. Our results remain robust when new entrants are less informed or the information structure differs. We also examine the cross-subsidization of broker's routing.

Keywords: Order By Order Competition, Auctions, Retail Trading, Routing, Brokers, PFOF

JEL Classification: G14, G18, G20

Suggested Citation

Ernst, Thomas and Spatt, Chester S. and Sun, Jian, Would Order-by-Order Auctions Be Competitive? (December 13, 2022). Available at SSRN: https://ssrn.com/abstract=4300505 or http://dx.doi.org/10.2139/ssrn.4300505

Thomas Ernst (Contact Author)

University of Maryland - Robert H Smith School of Business ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

Jian Sun

Lee Kong Chian School of Business, Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

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