Regulation NMS - Order Types and Routing Choices Driven by Make/Take Fees

Q: How does Reg NMS route orders, and why can this hurt net prices?

Reg NMS routes orders to the NBBO across fragmented exchanges. Because the NBBO does not account for exchange fees, many routed orders result in worse net prices once fees are included.

Q: What is the relationship between fee differences and the market share of refusing routings?

Larger fee differences increase the market share captured by orders that refuse Reg NMS routings. The effect is strongest for stocks where fees represent a high portion of transaction costs.

Q: Why do heterogeneous opportunity costs affect routing decisions?

The analysis shows that non-routable orders can entail lower non-execution costs than routable orders. This heterogeneity helps explain which orders rationally choose to route or refuse routing under Reg NMS.

Sep 3, 2026

Upload by Maeve

The Regulation National Market System (Reg NMS) links fragmented stock exchanges by routing orders to the National Best Bid and Offer (NBBO). Because the NBBO ignores exchange fees, 62% of routings lead to worse net prices. Increasing fee differences shifts market share toward orders that refuse Reg NMS routings, especially when fees form a large part of transaction costs. Heterogeneous opportunity costs explain routing choices: non-routable orders lower non-execution costs, revealing how fees and clientele segmentation shape order-type proliferation.

LanguageEnglish

CategoryGeneral

FormatPDF

Pages21

Reading Time7 min

AccessFree to download

Abstract

Reg NMS routing and NBBO

Fee effects on net prices

Order-type refusal and market share

Opportunity costs and non-execution tradeoffs

Evidence from order-type classifications

| Refusing the best price? ✩ Sida Lia, Mao Ye b,∗, Miles Zheng c | | | | | --- | --- | --- | --- | | a Brandeis University, United States
b Cornell University and NBER, 365 Sage Hall, 106 E Ave, Ithaca, NY 14853, United States c University of Illinois at Urbana-Champaign, United States | | | | | a r t i c l e i n f o | | a b s t r a c t | | | Article history:
Received 12 October 2021
Revised 10 November 2022
Accepted 11 November 2022
Available online 28 November 2022 | | The Regulation National Market System (Reg NMS) links fragmented stock exchanges by routing orders to the National Best Bid and Offer (NBBO). As the NBBO ignores exchange fees, 62% of routings lead to worse net prices. An increase in fee differences increases the market share captured by orders that refuse Reg NMS routings, particularly for stocks whose fees account for a large portion of transaction costs. Heterogeneous opportunity costs rationalize routing choices: non-routable orders entail lower non-execution costs than routable orders. Our results indicate that fees and clientele segmentation drive the proliferation of order types in the Reg NMS era.
© 2022 Elsevier B.V. All rights reserved. | | | Keywords:
Regulation NMS
Order types
Routing
Make/take fees
High-frequency trading | | | | | Panel A: Sample selection criteria | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | All NYSE securities | | | | | | | | 2413 | | Non-common stock equities (American Depository Receipts, units, certiﬁcates, and shares of beneﬁcial interest) | | | | | | | | −565 | | Common stocks of non-U. S. companies, closed-end funds, Real Estate Investment Trusts, and Americus Trust components, and exchange-traded funds | | | | | | | | −517 | | Dual-class stock | | | | | | | | −152 | | Price (December 31, 2009) < 5 | | | | | | | | −93 | | Universe sample | | | | | | | | 1086 | | Final sample by selecting every tenth stock from our universe sample (December 2009) | | | | | | | | 109 | | Panel B: Tickers of sample stocks | | | | | | | | | | ACI, AGL, AGP, AIG, AMD, AME, AOS, ARM, ATI, B, BAC, BBT, BGG, BW, BYI, CGA, CMN, CNS, CPN, CPO, CPX, CSS, CSX, CYH, DGI, DPL, DVN, ELY, EMR, ENZ, ES, ESE, EXP, FCN, FMR, FOR, GAS, GCI, GD, GEO, HL, HLX, HNZ, HRS, HW, HXL, IEX, IFF, IPI, IWA, JBL, JLL, JMP, JWN, KCI, KSU, MCD, MCS, MCY, MDC, MHP, MMC, MOS, MTG, MTZ, N, NOV, NPK, NWN, OKE, OSK, PCP, PPD, PVR, RAI, RGA, RGR, RGS, ROK, RRC, RRI, SBX, SHW, SMG, SON, SUG, SUR, SY, TC, TE, THC, TIN, TLB, TRC, TUP, USB, VMI, VQ, VSH, VVI, WFR, WGL, WGO, WMS, WPP, WWW, XCO, XEC, Y | | | | | | | | | | Panel C: Summary statistics for sample stocks | | | | | | | | | | | N | Mean | SD | 5% | 25% | 50% | 75% | 95% | | Market Cap | 109 | 6.3 | 15.28 | 0.23 | 0.79 | 2.17 | 3.73 | 26.29 | | Share | 109 | 1.36 | 8 | 0.02 | 0.09 | 0.23 | 0.61 | 2.41 | | Volume | | | | | | | | | | Share Price | 109 | 31.63 | 31.19 | 7.54 | 13.62 | 26.54 | 41.14 | 68.17 | | Destination | Number of routed
trades | Number of
routed shares | Market share (routed
volume / total routed
volume) | Operator (2010) | Market share (exchange trading volume / consolidated volume) | | --- | --- | --- | --- | --- | --- | | NYSE Arca | 4408,234 | 1015,980,000 | 53.86% | NYSE | 27.74% | | NASDAQ | 2877,660 | 493,862,000 | 26.18% | NASDAQ OMX | 31.97% | | BZX | 1426,802 | 254,230,000 | 13.48% | Bats Global | 16.97% | | EDGX | 225,823 | 49,951,000 | 2.65% | Bats Global | 5.52% | | National Stock Exchange | 281,237 | 49,503,100 | 2.62% | NSX | 1.42% | | Boston Stock Exchange | 73,749 | 11,315,900 | 0.60% | NASDAQ OMX | 7.83% | | Chicago Stock Exchange | 15,414 | 4634,200 | 0.25% | CHX Holdings | 0.59% | | EDGA | 30,654 | 3769,500 | 0.20% | Bats Global | 6.17% | | Philadelphia Stock Exchange | 8900 | 1706,100 | 0.09% | NASDAQ OMX | 0.58% | | BYX | 7296 | 992,100 | 0.05% | Bats Global

FAQs

How does Reg NMS route orders, and why can this hurt net prices?

Reg NMS routes orders to the NBBO across fragmented exchanges. Because the NBBO does not account for exchange fees, many routed orders result in worse net prices once fees are included.

What is the relationship between fee differences and the market share of refusing routings?

Larger fee differences increase the market share captured by orders that refuse Reg NMS routings. The effect is strongest for stocks where fees represent a high portion of transaction costs.

Why do heterogeneous opportunity costs affect routing decisions?

The analysis shows that non-routable orders can entail lower non-execution costs than routable orders. This heterogeneity helps explain which orders rationally choose to route or refuse routing under Reg NMS.

Sep 3, 2026

Upload by Maeve