Examination of Order Routing Choices and Market Quality under Zero Commission and Firm-level Events

Authors

Le ZhaoFollow

Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Major/Program

Business Administration

First Advisor's Name

Suchismita Mishira

First Advisor's Committee Title

Committee chair

Second Advisor's Name

Qiang Kang

Second Advisor's Committee Title

Committee member

Third Advisor's Name

Ozde Oztekin

Third Advisor's Committee Title

Committee member

Fourth Advisor's Name

Dallin Alldredge

Fourth Advisor's Committee Title

Committee member

Fifth Advisor's Name

Clark Wheatley

Fifth Advisor's Committee Title

Committee member

Keywords

market microstructure, venue competition, market quality

Date of Defense

6-7-2022

Abstract

This dissertation is comprised of three essays that focus on the topics related to order routing choices in the U.S. equity market. This research provides insights into the effect of the routing order choice to dark and lit venues on the market quality under the multiple types of the event. The empirical results are significant and robust. There are three chapters included: the first chapter discusses the dynamic fragmentation of dark and lit venues and market quality pre-and post-zero brokerage commission events. Major retail brokers that eliminate commissions dramatically increase their market share of client assets. They increasingly routed orders to off-exchange wholesale market makers instead of exchanges to potentially gain more payment for order flow to compensate for commission losses. Given the retail brokers’ routing trade-off, retail investors receive less price improvement per share. Zero commission traders increase the share of odd lots and smaller order size buckets. Overall, market liquidity improves surprisingly. Effective spreads decline with retail orders placed inside the bid-ask spread. Realized spreads are unchanged, but intraday volatility increases, suggesting that new orders are relatively uninformed. The second chapter analyzes the difference in routing order choice under a firm’s scheduled vs. unscheduled event. Using earnings announcements as the reoccurring, scheduled event and share repurchase announcements as the non-reoccurring, unscheduled event, we find that traders strategically choose off-exchange venues around scheduled events. We study and confirm that the scheduled events have higher information asymmetry, which appears to cause traders to route their orders to off-exchange venues. The last chapter explores the role of retail trading in dynamic trading fragmentation around market manipulation. We merge manipulation data from SMARTS/NASD with trading volume by exchange from TAQ. We find novel evidence that continuous trading manipulation does not equally impact the trading volume in each exchange. Changes in off-exchange trading volume share due to manipulation are positively associated with retail trading activities. Our findings suggest that manipulation increases the illiquidity curve while the retail trading flow dampens illiquidity.

Identifier

FIDC010731

Recommended Citation

Zhao, Le, "Examination of Order Routing Choices and Market Quality under Zero Commission and Firm-level Events" (2022). FIU Electronic Theses and Dissertations. 5066.
https://digitalcommons.fiu.edu/etd/5066