Journal of Financial Economics Vol. 68 No. 3 2003
Payment for order flow
Abstract
We develop a dynamic model of price competition in broker and dealer markets. With no payment for order flow, a zero-profit equilibrium exists. With payment for order flow, spreads widen to more than compensate for this payment; hence, there is no equilibrium in which market makers earn zero profits. While brokerage commissions for market orders can fall, the total transactions cost to submitting a market order remains positive. Consumer and social welfare are both lower in any equilibrium with payment for order flow; payment for order flow redistributes payoffs from traders who demand liquidity to those who supply it.
- DOI
- 10.1016/s0304-405x(03)00071-0
- Volume
- 68
- Issue
- 3
- Pages
- 379-411
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref