Abstract
Most financial security trading venues prioritize competing liquidity providers with price-time priority; entities displaying the best-priced limit order earliest trade with the next opposite-sided liquidity-demanding order. The New York Stock Exchange (NYSE) rule putting traders “on parity” is a vestige of the traditional floor-based trading model and favors floor-based traders. Parity requires that orders from floor brokers, the designated market maker, and the top of the electronic limit order book trade together. That is, floor trading interests can trade ahead of equally priced, previously arriving orders in the limit order book. The NYSE posits that floor traders provide valuable services to the investing public and one approach to remunerating them for these services is deviating from strict time priority. The cost of the potential benefits of the NYSE’s business model is not transparent. Our research is an initial attempt to quantify this cost.
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