Northwestern Kellogg logo

Take Action

Home | Faculty & Research Overview | Research

Research Details

Siphoned Apart: A Portfolio Perspective on Order Flow Segmentation, Journal of Financial Economics

Abstract

We study liquidity supply in fragmented markets. Market makers intermediate heterogeneous order flows, trading off spread revenue against inventory costs. Applying our model to payment for order flow (PFOF), we demonstrate that portfolio-based considerations of inventory management incentivize market makers to segment retail orders by siphoning them off-exchange. Banning order flow segmentation reduces total welfare, can make trading more costly for all investors, and can resolve a prisoner’s dilemma among market makers. These results differentiate our inventory-based model from the existing information-based theories of PFOF.

Type

Article

Author(s)

Markus Baldauf, Joshua Mollner, Bart Zhou Yueshen

Date Published

2024

Citations

Baldauf, Markus, Joshua Mollner, and Bart Zhou Yueshen. 2024. Siphoned Apart: A Portfolio Perspective on Order Flow Segmentation. Journal of Financial Economics.: Art. 103807.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more