Competition in the Market for Nasdaq Securities

The study investigates competition in the market for NASDAQ stocks during a recent period in U.S. equity markets history when three major ECNs - Archipelago, Island, and Instinet - are identifiable in TAQ. We show that the ECNs compete with NASDAQ's SuperMontage on the basis of quotes, execution times, and costs. The three ECNs differ due to uniqueness of their limit order books, cost schedules, and heterogeneity of trading clienteles. Informed traders are shown to prefer venues with sufficient liquidity over those that guarantee anonymity of executions. Despite high levels of segmentation, uneven regulation, and controversial order attraction practices, quote competitiveness is found to increase the probability of executions on all four venues