Within this new environment, how should markets compete, how should they be linked, and how should they be regulated? To address these questions, the author discusses several pressing issues such as price-time priority, liquidity rebates, tape revenue, pricing increments, and access fees as well as more general issues such as the viability of self-regulation.
In addition, the traditional market structure of member-owned cooperatives has given way to corporate ownership, which poses challenges for the self-regulatory structure underlying equity market supervision. Over time, technology has enabled the development of new trading systems and dramatically expanded the number of potential competitors. Crafted more than a quarter-century ago in a time of dominant markets interacting with smaller competitors, the National Market System (NMS) was based on a one-size-fits-all approach in which all trade orders were to be treated equally. equity markets and offers some alternative regulatory approaches that might be more consistent with this new competitive environment. This article outlines some important issues surrounding the evolving structure of the U.S. Technological challenges, governance issues, competitive pressures, and questions about the oversight of trading practices are but a few of the many forces besetting U.S. We also show that the predictions about the optimal trading behavior can have interesting implications on the observed behavior of intraday volume, volatility and prices. The cost savings from the optimal strategy over the simple continuous strategy can be substantial. We show that the optimal execution strategy involves both discrete and continuous trades, not only continuous trades as previous work suggested.
Using a limit-order-book market, we develop a simple framework to model the dynamics of supply/demand and its impact on execution cost. In this paper, we show that the dynamics of the supply/demand is of critical importance to the optimal execution strategy, especially when trading times are endogenously chosen. Previous studies on the optimal trading strategy to execute a given order focuses mostly on the static properties of the supply/demand. The supply/demand of a security in the market is an intertemporal, not a static, object and its dynamics is crucial in determining market participants' trading behavior. Our findings serve to underscore the importance of developing new theoretical models to more accurately reflect the changing and complex trading milieu. Limit orders placed by informed traders perform better than those placed by uninformed (i.e., individual) traders. We also find support for informed traders’ use of limit orders.
We find that informed (i.e., institutional) traders actually use market orders more often in the first half of the day than the second. Our study complements experimental research that shows that informed traders tend to take liquidity earlier in the trading day while acting as liquidity suppliers later in the day. In particular, we empirically examine the relative use of market versus limit orders by informed and liquidity traders early versus later in the trading day using detailed order and audit trail data from the NYSE. We empirically investigate the evolution of liquidity, as well as the changing strategies of informed traders, over the course of the trading day.
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