Professor Kumar Venkataraman presented an analysis of the impact of order routing to affiliated ATSs at the Financial Research Network in Sydney this week. Along with colleagues, he has examined whether order routing by brokers to Alternative Trading Systems (ATSs) that they own has an impact on execution quality, and in particular on fill rates and shortfall costs for institutional orders. Their analysis, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3338129 , offers perspectives on how brokers handle the tension between the incentives to route to their ATS and their obligations to provide best execution to their clients, shedding light on the relation between venue ownership, broker routing and execution outcomes. The results indicate that brokers with high affiliated ATS routing have lower fill rates and higher implementation shortfall costs than average. While a number of hypotheses may serve to explain this, the analysis sheds light on the trade-offs faced by institutions in the choice of venue for their orders and the value of improved disclosure about order routing incentives and execution quality for institutional orders.
Professor Venkataraman is Professor of Finance and the Maguire Chair in Energy Management at the Cox School of Business at Southern Methodist University. He serves on the editorial boards of the Journal of Financial and Quantitative Analysis, Journal of Financial Markets, Journal of Financial Research and Journal of Empirical Finance, and was recently appointed to the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC).