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WOULD ORDER-BY-ORDER AUCTIONS BE COMPETITIVE?



48 Pages Posted: 23 Dec 2022

See all articles by Thomas Ernst


THOMAS ERNST

University of Maryland - Robert H Smith School of Business


CHESTER S. SPATT

Carnegie Mellon University - David A. Tepper School of Business


JIAN SUN

Lee Kong Chian School of Business, Singapore Management University

Date Written: December 13, 2022


ABSTRACT

Retail trading flow is segregated from non-retail flow in U.S. equities,
consistent with market segmentation. We model theoretically two methods of
executing segregated retail trades: a) broker's routing, whereby brokers
evaluate and allocate orders based on each market maker's aggregate performance,
and b) order-by-order auctions, where market makers bid on each individual
order, a market structure suggested recently by the SEC leadership. We find that
order-by-order auctions improve allocative efficiency among market makers, but a
winner's curse problem in the auction can reduce retail investor welfare,
particularly at times of limited liquidity. Empirical analysis of Retail
Liquidity Programs (RLP) currently offered by exchanges shows that these
programs behave similarly to order-by-order auctions in our model.



Keywords: Order By Order Competition, Auctions, Retail Trading, Routing,
Brokers, PFOF

JEL Classification: G14, G18, G20

Suggested Citation: Suggested Citation

Ernst, Thomas and Spatt, Chester S. and Sun, Jian, Would Order-by-Order Auctions
Be Competitive? (December 13, 2022). Available at SSRN:
https://ssrn.com/abstract=4300505 or http://dx.doi.org/10.2139/ssrn.4300505


THOMAS ERNST (CONTACT AUTHOR)

UNIVERSITY OF MARYLAND - ROBERT H SMITH SCHOOL OF BUSINESS ( EMAIL )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States



CHESTER S. SPATT

CARNEGIE MELLON UNIVERSITY - DAVID A. TEPPER SCHOOL OF BUSINESS ( EMAIL )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)



JIAN SUN

LEE KONG CHIAN SCHOOL OF BUSINESS, SINGAPORE MANAGEMENT UNIVERSITY ( EMAIL )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore



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Plum Print visual indicator of research metrics
 * Usage
   * Abstract Views: 2150
   * Downloads: 545
 * Captures
   * Readers: 4
 * Mentions
   * News Mentions: 2
 * Social Media
   * Tweets: 7

see details


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