FINANCE


Refusing the best price? Journal of Financial Economics, 147, 2, February 2023 LINK TO PAPER


MAO YE


ASSOCIATE PROFESSOR Samuel Curtis Johnson


Graduate School of Management


Cornell SC Johnson College of Business Cornell University


Co-authors • Mao Ye, Associate Professor, Samuel Curtis Johnson Graduate School of


Management, Cornell SC Johnson College of Business, Cornell University


• Sida Lee, Brandeis University • Miles Zheng, University of Illinois at Urbana-Champaign


Summary To promote competition, most developed countries now allow a stock to be


traded outside its listing exchange, leading policymakers to consider whether and how to link these fragmented markets. In 2005, U.S. regulators chose to connect fragmented markets through the Regulation National Market System (Reg NMS), which establishes the national best bid and offer (NBBO) across competing stock exchanges and promulgates rules designed to route orders submitted to any exchange to the NBBO. Under Reg NMS rules, exchanges are interconnected and each exchange serves only as a point of entry for the same destination—the NBBO.


Surprisingly, orders that refuse Reg NMS routing comprise 57% of trading volume on the New York Stock Exchange (NYSE), and the incentive to circum- vent Reg NMS is so strong that it has led to a proliferation of order types. Why do most orders refuse Reg NMS routing? Why do some other orders accept Reg NMS routing? Te answers to these two questions provide the key to un- derstanding and improving market design, as creating the NBBO and routing to the NBBO are two cornerstones that differentiate the market structures of U.S. exchanges from those of exchanges in other countries. Te authors’ results indicate that fees and clientele segmentation drive the proliferation of order types in the Reg NMS era.


TO IMPACT CONTENTS


RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2023 EDITION


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