Working Paper: CEPR ID: DP14127
Authors: Hans Degryse; Nikolaos Karagiannis
Abstract: While regulators often mandate price priority across markets, they do not impose secondary priority rules. Order preferencing by a broker to a specific market may then serve as tiebreaker. We compare order preferencing, modeled as price-broker-time priority (PBT), to price-time priority (PT). The secondary priority rule determines a limit order's execution probability, and hence investors' choice between limit and market orders. When the tick is tight relative to the dispersion in investors' valuations, trading rates are higher with PBT whereas investor welfare is higher with PT. The opposite holds for wide ticks. Our model has empirical and regulatory implications regarding market fragmentation.
Keywords: Market Fragmentation; Priority Rules; Welfare; Queuing
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Priority Rules (C69) | Trading Rates (F19) |
| Anticipation Effect (D84) | Trading Rates (F19) |
| Queue-Joining Effect (C69) | Trading Rates (F19) |
| Priority Rules (C69) | Investor Welfare (G24) |
| Trading Behavior (G40) | Investor Welfare (G24) |
| Priority Rules (C69) | Market Quality (D49) |
| Depth of Order Book (C69) | Market Quality (D49) |
| Broker Behavior (G24) | Market Structure (D49) |
| Tick Size (Y10) | Broker Behavior (G24) |
| Welfare of Clients (I39) | Broker Behavior (G24) |