Refusing the best price?

Sida Li, Mao Ye and Miles Zheng

Journal of Financial Economics, 2023, vol. 147, issue 2, 317-337

Abstract: The Regulation National Market System (Reg NMS) links fragmented stock exchanges by routing orders to the National Best Bid and Offer (NBBO). As the NBBO ignores exchange fees, 62% of routings lead to worse net prices. An increase in fee differences increases the market share captured by orders that refuse Reg NMS routings, particularly for stocks whose fees account for a large portion of transaction costs. Heterogeneous opportunity costs rationalize routing choices: non-routable orders entail lower non-execution costs than routable orders. Our results indicate that fees and clientele segmentation drive the proliferation of order types in the Reg NMS era.

Keywords: Regulation NMS; Order types; Routing; Make/take fees; High-frequency trading (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:147:y:2023:i:2:p:317-337

DOI: 10.1016/j.jfineco.2022.11.004

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