Forming an orderly line - How queue-jumping drives excessive fragmentation

Abstract

We identify queue-jumping as a key mechanism that causes markets to fragment. We use the introduction (and partial removal) of the Order Protection Rule, which enforces strict inter-venue price (not time) priority, to observe its impacts on fragmentation. We document that brokers increasingly fragment their liquidity provision activities amongst alternative venues, and liquidity providers attempt to jump long queues on larger venues by increasing submissions to venues with short (or empty) queues, which reduces their adverse selection costs. Our findings help explain the acceleration of fragmentation in markets with trade-through prohibitions as compared to best executions, providing clear policy implications.