THE VALUE OF A MILLISECOND: STRUCTURAL SEGMENTATION OF UNINFORMED ORDER FLOW
| We exploit a recent market design change on the Canadian trading venue TSX Alpha to investigate the impact of a sudden segmentation of informed order flow between venues on overall market quality, transaction costs and welfare of market participants. We show that by combining a randomized speed bump for marketable orders only with an inverted fee structure, the new TSX Alpha overwhelmingly attracts uninformed order flow, leaving other venues to absorb relatively more informed trading. Despite its modest 8 percent market share, this segmentation negatively impacts liquidity on other Canadian trading venues, increasing costs for liquidity demanders and lowering profits for liquidity suppliers, but increasing profits for liquidity providers on TSX Alpha. Our paper has implications for market quality in the United States, where virtually all retail and uninformed order flow is segmented away from lit exchanges.