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- W2914280887 abstract "In this paper, we investigate the consequences of segregating retail order flow away from incumbent exchanges on overall market quality and trading costs, as well as identifying the welfare gains and losses for different groups of market participants. We exploit an exogenous shock to the equity market landscape in Canada, where one of the exchange venues, TSX Alpha, implemented a randomized speed bump for marketable orders only with an inverted fee structure. These changes make it attractive for small orders, while simultaneously making it very unattractive for large informed orders that are more likely to impose adverse selection costs. Canada is uniquely suited for this analysis, because it previously disallowed any type of internalization or payment for order flow, and dark trading is limited due to minimum price improvement regulations.We first document that the design changes led to a sizeable increase in the proportion of uninformed order flow on the relaunched Alpha. Second, we analyse market quality after the change. Among the other exchanges, we find widening effective spreads for liquidity demanders at the same time as reduced realized spreads for liquidity suppliers, resulting in welfare losses for both groups. We find that this is driven by increases in the adverse selection costs that liquidity suppliers face due to a higher probability of facing informed traders. The clear winners are liquidity suppliers on new Alpha who benefit from wider spreads and lower adverse selection, which outweigh increases in passive trading fees. Overall, the segmentation of uninformed order flow appears detrimental to market quality and aggregate welfare." @default.
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- W2914280887 date "2016-01-27" @default.
- W2914280887 modified "2023-09-23" @default.
- W2914280887 title "The Value of a Millisecond: Structural Segmentation of Uninformed Order Flow" @default.
- W2914280887 hasPublicationYear "2016" @default.
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