Is Best Really Better? Internalization of Orders in an Open Limit Order Book
Tóm tắt
We study the market quality of the Xetra BEST system operated by Deutsche Borse AG, an internalization system designed as part of an open limit order book, which guarantees a price improvement over the inside spread in the Xetra order book. We develop a structural model of this dual market environment and show that adverse selection costs of internalized trades are significantly lower than those of regular order book trades while realized spreads are significantly larger. The cost savings of the internalizer are larger than the mandatory price improvement, suggesting that internalization can be profitable for both customer and internalizer.
Tài liệu tham khảo
Battalio, Robert H. (1997), Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?, Journal of Finance 52, 341–352.
Battalio, Robert H. and Craig W. Holden (2001), A Simple Model of Payment for Order Flow, Internalization, and Total Trading Cost, Journal of Financial Markets 4, 33–71.
Battalio, Robert H., Jason Greene, and Robert Jennings (1997), Do Competing Specialists and Preferencing Dealers Affect Market Quality?, Review of Financial Studies 10, 969–993.
Battalio, Robert, Robert Jennings, and Jamie Selway (2001), The Relationship Among Market-Making Revenue, Payment for Order Flow, and Trading Costs for Market Orders, Journal of Financial Services Research 19, 39–56.
Biais, Bruno and Didier Davydoff (2002), Internalization, Investor Protection and Market Quality, Working Paper.
Bloomfield, Robert and Maureen O’Hara (1998), Does Order Preferencing Matter?, Journal of Financial Economics 50, 3–37.
Chakravarty, Sugato (2001), Stealth-Trading: Which Traders’ Trades Move Stock Prices?, Journal of Financial Economics 61, 289–307.
Easley, David, Nicholas M. Kiefer, and Maureen O’Hara (1996), Cream-Skimming or Profit Sharing? The Curious Role of Purchased Order Flow, Journal of Finance 51, 811–833.
Glosten, Lawrence R. (1994), Is the Electronic Open Limit Order Book Inevitable?, Journal of Finance 49, 1127–1161.
Glosten, Lawrence R. and Lawrence E. Harris (1988), Estimating the Components of the Bid-Ask Spread, Journal of Financial Economics 21, 123–142.
Hansch, Oliver, Narayan Naik, and S. Viswanathan (1999), Preferencing, Internalization, Best Execution, and Dealer Profits, Journal of Finance 54, 1799–1828.
Huang, Roger D. and Hans R. Stoll (1996), Dealer versus Auction Markets: A Paired Comparison of Execution Costs on NASDAQ and the NYSE, Journal of Financial Economics 41, 313–357.
Huang, Roger D. and Hans R. Stoll (1997), The Components of the Bid-Ask Spread: A General Approach, Review of Financial Studies 10, 995–1034.
Kandel, Eugene and Leslie M. Marx (1999), Payments for Order Flow on Nasdaq, Journal of Finance 54, 35–66.
Linnainmaa, Juhani (2003), Who Makes the Limit Order Book? Implications for Contrarian Strategies, Attention-Grabbing Hypothesis, and the Disposition Effect, Working Paper, University of California Los Angeles.
Madhavan, Ananth, Matthew Richardson, and Mark Roomans (1997), Why Do Securities Prices Change? A Transaction-Level Analysis of NYSE Stocks, Review of Financial Studies 10, 1035–1064.
Maher, Owen, Peter L. Swan, and P. Joakim Westerholm (2008): Twilight Falls on the Limit Order Book: Endogeneity and the Demise of Broker Identity, Working Paper.
Parlour, Christine A. and Uday Rajan (2001), Payment for Order Flow, Working Paper, Carnegie Mellon University.
Peterson, Mark A. and Erik R. Sirri (2003), Order Preferencing and Market Quality on U.S. Equity Exchanges, Review of Financial Studies 16, 385–415.