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Competition for Order Flow and Smart Order Routing Systems




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    • Thierry Foucault is from HEC School of Management, Paris; Albert J. Menkveld is from the Vrije Universiteit Amsterdam. We thank an anonymous referee and the editor, Rob Stambaugh, for very useful comments. We thank Robert Battalio, Bruno Biais, Ekkehart Boehmer, Jean-François Gajewski, Carole Gresse, Oliver Hansch, Joel Hasbrouck, Terry Hendershott, Charles Jones, Stewart Mayhew, Marco Pagano, Christine Parlour, Ailsa Roëll, Gideon Saar, Patrik Sandås, Duane Seppi, Mark Spanbroek, Chester Spatt, Ilias Tsiakas, Dan Weaver, and seminar participants at Netherlands Authority for the Financial Markets, Autorités des Marchés Financiers, European Commission, NYSE, Securities Exchange Commission, University of Amsterdam, University of Copenhagen, University of Virginia, University of Salerno, Universitat Pompeu Fabra, and attendants of the 2005 European Finance Association Meeting, the 2006 American Finance Association Meeting, the International Conference on Finance in Copenhagen, the International Conference on New Financial Market Structures in Montreal, and the INQUIRE meeting for useful comments. We thank Patricia van Dam and Friso van Huijstee for excellent research assistance and Arjen Siegmann for sharing his Perl expertise. For this project, Menkveld is grateful to Netherlands Organization for Scientific Research for a VENI grant and to Joel Hasbrouck for a visiting scholarship at NYU-Stern in 2004–2005. We also gratefully acknowledge the support of the Europlace Institute of Finance. Last, we thank Euronext, the London Stock Exchange, and the online broker Alex for their sponsorship. Of course, we bear the entire responsibility of the paper and all errors are ours.


We study the rivalry between Euronext and the London Stock Exchange (LSE) in the Dutch stock market to test hypotheses about the effect of market fragmentation. As predicted by our theory, the consolidated limit order book is deeper after entry of the LSE. Moreover, cross-sectionally, we find that a higher trade-through rate in the entrant market coincides with less liquidity supply in this market. These findings imply that (i) fragmentation of order flow can enhance liquidity supply and (ii) protecting limit orders against trade-throughs is important.

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