Payments for order flow on Nasdaq

Eugene Kandel, Leslie M. Marx

Research output: Contribution to journalArticlepeer-review

30 Scopus citations

Abstract

We present a model of Nasdaq that includes the two ways in which marketmakers compete for order flow: quotes and direct payments. Brokers in our model can execute small trades through a computerized system, preferencing arrangements with marketmakers, or vertical integration into market making. The comparative statics in our model differ from those of the traditional model of dealer markets, which does not capture important institutional features of Nasdaq. We also show that the empirical evidence is inconsistent with the traditional model, which suggests that preferencing and vertical integration are important components in understanding Nasdaq.

Original languageAmerican English
Pages (from-to)35-66
Number of pages32
JournalJournal of Finance
Volume54
Issue number1
DOIs
StatePublished - Feb 1999

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