Study of brokers' potential conflict of interest in routing limit orders leaked to Wall Street
A new academic paper about potential conflict of interest in large retail brokers’ routing of limit orders has stirred controversy on Wall Street and caught regulators’ attention -- even before the paper has been submitted to a journal.
While some in the industry have compared the study’s possible impact to an earlier one that reformed Nasdaq trading, the authors caution that the paper is not yet final and the findings should be taken in proper context.
The authors, professors at Indiana University's Kelley School of Business and the University of Notre Dame Mendoza College of Business, found that some large retail brokers regularly route clients' limit orders to the exchange that pays them the highest rebates. Under certain circumstances, this can lead to some clients’ trades not being executed at the best possible times -- or not being executed at all.