Disclosure of information on order execution practices of market centers: How can investors utilize it?

Financial Services Review, Summer 2004 by Saraoglu, Hakan, Ascioglu, N Asli

We show that orders submitted to the NYSE, AMEX, Nasdaq, and regional exchanges are executed almost with the full-submitted size for all order types except near-thc-quote limit orders. Because these limit orders are submitted outside the best bid price and best ask price, they might expire without execution as the prices move away from the submitted limit price. ECNs have very high oil rates that are close to one for all types of orders except market orders. ECNs' fill rate is only 0.4263 for market orders. The ECNs that we include in our analysis route more than half of the market orders to other market centers. As a result, orders submitted to ECNs take the highest execution time among all the market centers with 16.3748 seconds for market orders. For each market center, marketable limit orders take more time to execute than market orders except ECNs. NYSE and Nasdaq have relatively low execution times of 6.3536 seconds and 6.8370 seconds for market orders, respectively. Regional exchanges and AMEX execute market orders at around 10.4404 seconds and 13.9382 seconds, respectively. At-the-quote limit orders and near-the-quote limit orders wait longer than other order types to be executed on each market center, since those orders will take their place behind the marketable limit orders and inside-the-quote limit orders on the limit order book.

After we calculate the values of RSPR, FR, and ES, we transform them so that they map onto the interval ranging from one to nine, where the minimum value and the maximum value are transformed to one and nine, respectively. The variables for which the decisionmaker requires smaller values are transformed so that the maximum value corresponds to one and the minimum value corresponds to nine. Then, we normalize the transformed values to calculate the relative strength weights of the market center-order type pairs in terms of the execution quality criteria. Similar normalization methods are used in studies that incorporate quantitative data to the AHP (see Week et al., 1997; and Yu et al., 2000). Table 7 shows the relative strength weights for market center-order type pairs based on the values of the execution quality criteria. For example, given its realized spread value, NYSE-inside-the-quote limit order pair has the highest strength weight of 0.0681, indicating that an inside-the-quote limit order executed at the NYSE is the best choice for the investor under the potential loss criterion. After determining the relative importance of the execution quality criteria and the strength of the market center-order type pairs under each criterion, we combine them to determine the relative suitability of market center-order type pairs for executing a small order of QQQ for the hypothetical investor in our example. The relative strength weights of market center-order type pairs under the execution quality criteria form a 25 � 3 matrix. Each row of the matrix represents a market center-order type pair and each column represents a criterion. The relative importance weights of the execution quality criteria for the investor form a 3 � 1 vector. We multiply the relative strength matrix of the market center-order type pairs by the relative importance vector of the execution quality criteria to obtain a 25 X 1 vector, which reflects the relative suitability of the market center-order type pairs for the investor. Table 8 shows the elements of this vector as well as the suitability rankings of the market center-order type pairs.