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Track T2-3: Microstructure
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| Presentations | ||
What Does Best Execution Look Like? 1University of Maryland; 2Boston College; 3Carnegie Mellon University; 4Singapore Management University U.S. retail brokers route order flow to wholesalers based on their past performance. Brokers face a strategic choice over how often to reallocate order flow, how aggressively to reward or punish performance, and what history, across time or securities, to consider. This paper analyzes how broker choices for allocating order flow shape competition among wholesalers. Our empirical results are consistent with the theory that prospects for future order flow provide wholesalers with strong incentives to offer price improvement and allow brokers to discipline the provision of liquidity.
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