Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171941
Authors: 
Cimon, David A.
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-50
Abstract: 
The primary focus of this paper is to study conflict of interest in the brokerage market. Brokers face a conflict of interest when the commissions they receive from investors differ from the costs imposed by different trading venues. I construct a model of limit order trading in which brokers serve as agents for investors who wish to access equity markets. I find that brokers preferentially route marketable orders to venues with lower liquidity demand fees, driving up the execution probability at these venues and lowering adverse selection costs. When fees for liquidity supply and demand are sufficiently different, brokers route liquidity supplying orders to separate venues, where investors suffer from lower execution probability and higher costs of adverse selection.
Subjects: 
Financial markets
Market structure and pricing
JEL: 
G24
G28
Document Type: 
Working Paper

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