Is BEST really better? : Internalization of orders in an open limit order book

This paper studies the market quality of an internalization system which is designed as part of an open limit order book (the Xetra system operated by Deutsche Börse AG). The internalization sys-tem (Xetra BEST) guarante
This paper studies the market quality of an internalization system which is designed as part of an open limit order book (the Xetra system operated by Deutsche Börse AG). The internalization sys-tem (Xetra BEST) guarantees a price improvement over the inside spread in the Xetra order book. We develop a structural model of this unique dual market environment and show that, while adverse selection costs of internalized trades are significantly lower than those of regular order book trades, the realized spreads (the revenue earned by the suppliers of liquidity) is significantly larger. The cost savings of the internalizer are larger than the mandatory price improvement. This suggests that internalization can be profitable both for the customer and the internalizer. JEL Classification: G10 Keywords: Internalization , Execution Quality , Adverse Selection Costs
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Metadaten
Author:Joachim Grammig, Erik Theissen
URN:urn:nbn:de:hebis:30-91466
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2011,03
Series (Serial Number):CFS working paper series (2011, 03)
Document Type:Working Paper
Language:English
Year of Completion:2011
Year of first Publication:2011
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2011/02/14
Tag:Adverse Selection Costs; Execution Quality; Internalization
SWD-Keyword:Deutsche Börse; Xetra-Handelssystem
Issue:January 2011
Pagenumber:37
HeBIS PPN:233051716
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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