Broker Routing Decisions in Limit Order Markets

Publisher Website
Google Scholar
Abstract
The focus of this paper is to study conflict of interest in the brokerage market. Brokers face a conflict of interest when the commissions they receive differ from the costs imposed by trading venues. I model brokers who serve as agents for investors who wish to access equity markets. Brokers preferentially route marketable orders to venues with lower liquidity demand fees, increasing the execution probability and lowering adverse selection costs at these venues. Brokers require higher commissions to send limit orders to these same venues. As a result, brokers earn higher profits, while both investor utility and overall welfare decline.

This publication has 0 references indexed in Scilit: