Non-Conflicted Trader “Maker-Taker” Decisions and Execution Quality

Abstract

Under U.S. equity transaction-based pricing systems, prior research suggests retail brokers (i.e., conflicted traders) maximize their order flow payments at the expense of their client limit order execution quality. In our study, we examine order type decisions for those who execute their own orders (i.e., non-conflicted traders) and the relation between trading rebates-fees and execution quality. Similar to the conflicted, non-conflicted traders make routing decisions that generate rebates for both limit and marketable orders; but these strategies do not result in consistently lower execution quality dimensions. Our results suggest that higher order flow payments can coincide with higher execution quality.