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Competition for Order Flow and Smart Order Routing Systems

Thierry Foucault and Albert J. Menkveld
The Journal of Finance
Vol. 63, No. 1 (Feb., 2008), pp. 119-158
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/25094436
Page Count: 40
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Competition for Order Flow and Smart Order Routing Systems
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Abstract

We study the rivalry between Euronext and the London Stock Exchange (LSE) in the Dutch stock market to test hypotheses about the effect of market fragmentation. As predicted by our theory, the consolidated limit order book is deeper after entry of the LSE. Moreover, cross-sectionally, we find that a higher trade-through rate in the entrant market coincides with less liquidity supply in this market. These findings imply that (i) fragmentation of order flow can enhance liquidity supply and (ii) protecting limit orders against trade-throughs is important.

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