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Would Order‐By‐Order Auctions Be Competitive?

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  • THOMAS ERNST
  • CHESTER SPATT
  • JIAN SUN

Abstract

We model two methods of executing segregated retail orders: brokers' routing, whereby brokers allocate orders using the market maker's overall performance, and order‐by‐order auctions, where market makers bid on individual orders, a recent U.S. Securities and Exchange Commission proposal. Order‐by‐order auctions improve allocative efficiency, but face a winner's curse reducing retail investor welfare, particularly when liquidity is limited. Additional market participants competing for retail orders fail to improve total efficiency and investor welfare when entrants possess information superior to incumbent wholesalers. Our results hold when new entrants are less informed or the information structure differs. We also examine the cross‐subsidization of brokers' routing.

Suggested Citation

  • Thomas Ernst & Chester Spatt & Jian Sun, 2025. "Would Order‐By‐Order Auctions Be Competitive?," Journal of Finance, American Finance Association, vol. 80(4), pages 1879-1927, August.
    • Handle: RePEc:bla:jfinan:v:80:y:2025:i:4:p:1879-1927
    DOI: 10.1111/jofi.13449
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