Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow
Posted: 25 Aug 1998
Emergence of new financial markets has led to fragmentation of order flows, leading to reduced liquidity in any particular market. Some markets are alleged to compete by focusing on "cream-skimming" of uninformed trades, leaving informed trades to established markets. We develop a test of this hypothesis, using a model of the stochastic process of trades. We use trade flow data for a sample of stocks on NYSE and an alternative site to estimate the information content of trades by trade site. The model is fit by maximum likelihood. We find differences in the information content of trades across sites. The difference is consistent with cream-skimming.
JEL Classification: G19
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