Size Precedence and Share Volume: The Case of the PSX Exchange

Abstract

Most equity exchanges operate with a price-time priority market structure. Using a natural experiment, this study examines the ability of an exchange to attract share volume when size is the secondary precedence rule. In 2010, the NASDAQ OMX Group, Inc. and the Philadelphia Exchange launched the PSX equity exchange with a price-size pro-rata allocation market model. When operating under a pro-rata allocation algorithm, PSX is able to attract more volume than during a price-time regime. Systemic factors are imperative, as there is substantial evidence that the PSX attracts volume in times of heightened market volatility, but PSX volume decreases when market returns are positive. Competition is increasingly important in a fragmented market. There is evidence that order routing fees and the prevalence of off-exchange trading are significant factors in the ability of the PSX to capture market share. The results are of interest to market participants, regulators, and exchange officials.