The Cost of Exposing Large Institutional Orders to Electronic Liquidity Providers

Robert Battalio (), Brian Hatch () and Mehmet Sağlam ()
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Robert Battalio: Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556
Brian Hatch: Carl H. Lindner College of Business, University of Cincinnati, Cincinnati, Ohio 45221
Mehmet Sağlam: Carl H. Lindner College of Business, University of Cincinnati, Cincinnati, Ohio 45221

Management Science, 2024, vol. 70, issue 6, 3597-3618

Abstract: We use a novel data set to examine the impact of exposing institutional orders to electronic liquidity providers (ELPs). We present empirical evidence that marketable pieces of large parent orders are routed to ELPs seemingly to avoid paying liquidity fees on exchanges. This routing decision results in lower net effective spreads for these child orders but leads to higher execution shortfall for the parent order. We provide evidence suggestive of a causal relation by utilizing the parent orders of investors that disallow the broker to route their child orders to ELPs. Our analysis suggests that ELPs detect the presence of the parent order very quickly given the transparent bilateral relation with the broker.

Keywords: electronic liquidity providers; high-frequency trading; institutional transaction costs (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3597-3618

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