Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow

Memo 1995-5

Posted: 25 Aug 1998  

David Easley

Cornell University - Department of Economics

Nicholas M. Kiefer

Cornell University

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Abstract

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

Suggested Citation

Easley, David and Kiefer, Nicholas M. and O'Hara, Maureen, Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow. Memo 1995-5. Available at SSRN: https://ssrn.com/abstract=6544

David Easley

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Nicholas M. Kiefer (Contact Author)

Cornell University ( email )

Building 350
Ithaca, NY 14853
United States
607-255-6315 (Phone)
607-539-6366 (Fax)

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

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