Quote-based competition and trade execution costs in NYSE-listed stocks |
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Authors: | Hendrik Bessembinder |
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Affiliation: | Department of Finance, David Eccles School of Business, 1645 East Campus Center Drive, University of Utah, Salt Lake City, UT 84112, USA |
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Abstract: | This study examines quotations, order routing, and trade execution costs for seven markets that compete for orders in large-capitalization NYSE-listed stocks. The competitiveness of quote updates from each market varies with measures of the profitability of attracting additional order and with volatility and inventory measures. The probability of a trade executing on each market increases when the market posts competitive quotes. Execution costs for non-NYSE trades when the local market posts competitive (non-competitive) quotes are virtually the same (substantially exceed) costs for matched NYSE trades. Collectively, these results imply a significant degree of quote-based competition for order flow and are consistent with off-NYSE liquidity providers using competitive quotations to signal when they are prepared to give better-than-normal trade executions. |
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Keywords: | Competition for order flow Quotation strategies Trading costs |
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