Publication Type
Journal Article
Version
publishedVersion
Publication Date
8-2025
Abstract
We model two methods of executing segregated retail orders: brokers’ routing,whereby brokers allocate orders using the market maker’s overall performance, andorder-by-order auctions, where market makers bid on individual orders, a recent U.S.Securities and Exchange Commission proposal. Order-by-order auctions improve al-locative efficiency, but face a winner’s curse reducing retail investor welfare, partic-ularly when liquidity is limited. Additional market participants competing for retailorders fail to improve total efficiency and investor welfare when entrants possess in-formation superior to incumbent wholesalers. Our results hold when new entrants are less informed or the information structure differs. We also examine the cross-subsidization of brokers’ routing.
Keywords
Order By Order Competition, Auctions, Retail Trading, Routing, Brokers, PFOF
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Journal of Finance
Volume
80
Issue
4
First Page
1875
Last Page
2437
ISSN
0022-1082
Identifier
10.1111/jofi.13449
Publisher
Wiley
Citation
ERNST, Thomas; SPATT, Chester; and SUN, Jian.
Would order-by-order auctions be competitive?. (2025). Journal of Finance. 80, (4), 1875-2437.
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/10.1111/jofi.13449