Competition for Order Flow with Fast and Slow Traders

V.L. van Kervel

doi:10.1093/rfs/hhv023

Competition for Order Flow with Fast and Slow Traders

V.L. van Kervel

Finance

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

The rise of computerized trading strategies in equity markets has spurred competition between trading venues. This paper shows that cross-venue strategies create highly interlinked markets: trades on one venue are followed by sizeable cancellations of limit orders on competing venues. These cancellations are explained in a simple model of competition between two limit order markets with fast and slow traders. Only the fast traders can access the liquidity of both venues simultaneously. Empirically, we confirm the predictions that the fraction of fast traders (1) reduces the equilibrium liquidity supply and (2) reduces the magnitude of the cancellations following a trade.

Original language	English
Pages (from-to)	2094-2127
Journal	The Review of Financial Studies
Volume	28
Issue number	7
DOIs	https://doi.org/10.1093/rfs/hhv023
Publication status	Published - 2015

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10.1093/rfs/hhv023

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Cite this

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title = "Competition for Order Flow with Fast and Slow Traders",

abstract = "The rise of computerized trading strategies in equity markets has spurred competition between trading venues. This paper shows that cross-venue strategies create highly interlinked markets: trades on one venue are followed by sizeable cancellations of limit orders on competing venues. These cancellations are explained in a simple model of competition between two limit order markets with fast and slow traders. Only the fast traders can access the liquidity of both venues simultaneously. Empirically, we confirm the predictions that the fraction of fast traders (1) reduces the equilibrium liquidity supply and (2) reduces the magnitude of the cancellations following a trade.",

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AB - The rise of computerized trading strategies in equity markets has spurred competition between trading venues. This paper shows that cross-venue strategies create highly interlinked markets: trades on one venue are followed by sizeable cancellations of limit orders on competing venues. These cancellations are explained in a simple model of competition between two limit order markets with fast and slow traders. Only the fast traders can access the liquidity of both venues simultaneously. Empirically, we confirm the predictions that the fraction of fast traders (1) reduces the equilibrium liquidity supply and (2) reduces the magnitude of the cancellations following a trade.

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