Public Disclosure and Private Decisions: Equity Market Execution Quality and Order Routing

In 2001, the SEC required market centers to publish monthly execution-quality reports in an effort to spur competition for order flow between markets. Using samples of stocks trading on several markets, we investigate whether past execution quality affects order-routing decisions and whether the new disclosure requirements influence this relationship. We find that routing decisions are associated with execution quality; markets reporting low execution costs and fast fills subsequently receive more orders. Moreover, the reports themselves appear to provide information that was unavailable previously. Our results are consistent with active competition for order flow that can be influenced by public disclosure.

[1]  Maureen O'Hara,et al.  Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow , 1996 .

[2]  Herbert M. Kaufman,et al.  A Cross-Exchange Comparison of Execution Costs and Information Flow for Nyse-Listed Stocks , 1997 .

[3]  George Sofianos,et al.  Quantifying market order execution quality at the New York stock exchange , 2003 .

[4]  J. Hanna,et al.  Profitable Predictability in the Cross Section of Stock Returns , 2005 .

[5]  Kee H. Chung,et al.  Order Preferencing and Market Quality on NASDAQ Before and after Decimalization , 2004 .

[6]  M. Lipson.  Competition Among Market Centers , 2003 .

[7]  Ekkehart Boehmer,et al.  Dimensions of execution quality: Recent evidence for US equity markets , 2005 .

[8]  H. Stoll,et al.  Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE , 1996 .

[9]  Lee G. Cooper,et al.  Market-Share Analysis , 1988 .

[10]  Hendrik Bessembinder,et al.  Trade Execution Costs and Market Quality after Decimalization , 2003, Journal of Financial and Quantitative Analysis.

[11]  Tarun Chordia,et al.  Order imbalance and individual stock returns: theory and evidence , 2004 .

[12]  Charles M. C. Lee.  Market Integration and Price Execution for NYSE-Listed Securities , 1993 .

[13]  Ekkehart Boehmer,et al.  Institutional Investors and the Informational Efficiency of Prices , 2005 .

[14]  Lee G. Cooper,et al.  Technical Note---Simplified Estimation Procedures for MCI Models , 1982 .

[15]  E. Sirri,et al.  Order Submission Strategy and the Curious Case of Marketable Limit Orders , 2002, Journal of Financial and Quantitative Analysis.

[16]  M. Blume,et al.  Differences in Execution Prices Among the NYSE, the Regionals, and the NASD , 1991 .

[17]  Hendrik Bessembinder,et al.  Quote-based competition and trade execution costs in NYSE-listed stocks , 2003 .

[18]  H. Bessembinder,et al.  Selection Biases and Cross-Market Trading Cost Comparisons* , 2003 .

[19]  R. Huang,et al.  The Quality of ECN and Nasdaq Market Maker Quotes , 2002 .

[20]  Thierry Foucault,et al.  Competition for Order Flow and Smart Order Routing Systems , 2006 .

[21]  Hendrik Bessembinder.  Trade Execution Costs on Nasdaq and the NYSE: A Post-Reform Comparison , 1998 .