Does the Prohibition of Trade-Through Hurt Liquidity Demanders?

The order protect rule (OPR) in the United States generally prohibits any trade-through, that is, a market order that is not executed at the best possible price among fast (electronic and automated) trading venues. By deriving upper and lower bounds for the difference in the execution costs in a dynamic model, we find that, although trade-through allows for flexible trading strategies and may benefit the liquidity demander, the benefit is insignificant in most cases, especially for small trades and stocks with fast resilience. Therefore, considering other benefits of the OPR studied in the literature, this study supports the regulation and suggests that the current separate regulations for fast and slow venues may be extended to differentiate stocks with fast and slow resilience speeds.

Funding: P. Gao received financial support from the National Natural Science Foundation of China [Grants 72201234 and 72192805] and the Research Grant Council of Hong Kong (the Collaborative Research Fund) [Grant C6032-21G].

Supplemental Material: The online appendix is available at https://doi.org/10.1287/opre.2023.2454.