Publication Type
Working Paper
Version
publishedVersion
Publication Date
6-2023
Abstract
We model two different methods of executing segregated retail orders: broker's routing, whereby brokers allocate orders using market maker's overall performance, and order-by-order auctions, where market makers bid on individual orders, a recent SEC proposal. Order-by-order auctions improve market maker allocative efficiency, but face a winner's curse reducing retail investor welfare, particularly when liquidity is limited. Additional market participants competing for retail orders fail to improve total efficiency and investor welfare when entrants possess information superior to incumbent wholesalers. Existing Retail Liquidity Programs empirically suggest order-by-order auctions would attract few bidders in less liquid stocks and low-liquidity periods.
Keywords
Order By Order Competition, Auctions, Retail Trading, Routing, Brokers, PFOF
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
First Page
1
Last Page
85
Identifier
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4300505
Citation
ERNST, Thomas; SPATT, Chester; and SUN, Jian.
Would order-by-order auctions be competitive?. (2023). 1-85.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7358
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.4300505