Abstract
This paper reviews the up-to-date theoretical, empirical, and experimental literature related to the trading venue choice in the context of the fragmented equity markets. We provide a brief background on the history of trading fragmentation in the equity market and its determinants. We discuss the direct and indirect impacts of the market fragmentation on market quality in various dimensions, including liquidity, volatility, and price efficiency. Next, we identify possible determinants and channels from theoretical and empirical studies that could explain order routing decisions and present the possible directions for future research. Finally, we discuss the major regulatory reforms in the U.S. equity market on routing venue decisions. This topic is relevant in current times when phenomena such as “GameStop Frenzy” have drawn significant attention to commission-free trading venues.
Highlights
The evolution of the United States stock exchange started in 1790 with the birth of the Philadelphia stock exchange
This section briefly shows the evolution of U.S equity exchanges and discusses the related theoretical and empirical literature that focus on the impact of market fragmentation and venue competition
The results show the spreads substantially decrease in both lit fragmentation and dark trading venues after the implementation of
Summary
The evolution of the United States stock exchange started in 1790 with the birth of the Philadelphia stock exchange. System (Reg-NMS) regulatory policy that allows new trading venues. The routing decision is directly affected by the market design, which decides the venue’s pricing structure, levels of transparency, and execution quality. We document the changes in the studies from examining features of call vs continuous markets to limit order vs hybrid market Studies such as Venkataraman (2001) and Brogaard et al (2021) highlight the role of human intermediates and show that floor trading service by humans is irreplaceable because of their expertise. The routing venue decision involves the trade-offs among transaction cost, execution risk, and adverse selection risk. We discuss the major regulatory reforms in the U.S equity market that impact the market trading environment and the routing venue decision.
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