Does the Prohibition of Trade-Through Hurt Liquidity Demanders?

Ningyuan Chen (), Pin Gao () and Steven Kou ()
Additional contact information
Ningyuan Chen: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
Pin Gao: School of Data Science, The Chinese University of Hong Kong, Shenzhen 518172, China; Shenzhen Institute of Artificial Intelligence and Robotics for Society, Shenzhen 518172, China
Steven Kou: Department of Finance, Questrom School of Business, Boston University, Boston, Massachusetts 02215

Operations Research, 2023, vol. 71, issue 5, 1458-1471

Abstract: The order protect rule (OPR) in the United States generally prohibits any trade-through, that is, a market order that is not executed at the best possible price among fast (electronic and automated) trading venues. By deriving upper and lower bounds for the difference in the execution costs in a dynamic model, we find that, although trade-through allows for flexible trading strategies and may benefit the liquidity demander, the benefit is insignificant in most cases, especially for small trades and stocks with fast resilience. Therefore, considering other benefits of the OPR studied in the literature, this study supports the regulation and suggests that the current separate regulations for fast and slow venues may be extended to differentiate stocks with fast and slow resilience speeds.

Keywords: Financial Engineering; market microstructure; order execution; dynamic programming; model-free; equilibrium (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/opre.2023.2454 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:71:y:2023:i:5:p:1458-1471

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().