We model how securities dealers respond to regulations on leverage, position, and liquidity such as those imposed by the Basel III framework. The dealers respond by endogenously moving to make markets on an agency basis, matching buyers to sellers rather than taking client positions on the balance sheet. Agency-based market making creates a cost-risk tradeoff in which investor welfare declines but dealers become less risky. The costs to investors do not show up in all liquidity metrics: while asset prices exhibit greater price impact, bid-ask spreads do not change and trading volumes can even increase, which can help explain the varying findings from the empirical literature.

Latency delays intentionally slow order execution at an exchange, often to protect market makers against latency arbitrage. We study informed trading in a fragmented market in which one exchange introduces a latency delay on market orders. Liquidity improves at the delayed exchange as informed investors emigrate to the conventional exchange, where liquidity worsens. In aggregate, implementing a latency delay worsens total expected welfare. We find that the impact on price discovery depends on the relative abundance of speculators. If the exchange with delay technology competes against a conventional exchange, it implements a delay only if it has sufficiently low market share.

The primary focus of this paper is to study conflict of interest in the brokerage market. Brokers face a conflict of interest when the commissions they receive from investors differ from the costs imposed by different trading venues. I construct a model of limit order trading in which brokers serve as agents for investors who wish to access equity markets. I find that brokers preferentially route marketable orders to venues with lower liquidity demand fees, driving up the execution probability at these venues and lowering adverse selection costs. When fees for liquidity supply and demand are sufficiently different, brokers route liquidity supplying orders to separate venues, where investors suffer from lower execution probability and higher costs of adverse selection. Bank topics: Financial markets; Market structure and pricing JEL codes: G24; G28 Résumé Cet article étudie principalement les conflits d'intérêts dans le marché du courtage. Les courtiers se trouvent devant un conflit d'intérêts lorsque les commissions qu'ils reçoivent des investisseurs diffèrent des coûts qu'exigent les différentes plateformes de négociation. L'auteur construit un modèle de négociation d'ordres à cours limité dans lequel les courtiers servent d'intermédiaires aux investisseurs qui souhaitent accéder aux marchés boursiers. Il constate que les courtiers préfèrent acheminer les ordres négociables vers des plateformes dont les frais liés à la demande de liquidité sont moindres, ce qui augmente la probabilité d'exécution sur ces plateformes et réduit les coûts d'antisélection. Lorsque les frais associés à l'offre et à la demande de liquidité sont suffisamment différents, les courtiers transmettent les ordres favorisant l'offre de liquidité à des plateformes distinctes; ainsi, les investisseurs voient diminuer la probabilité d'exécution de leurs ordres et subissent des coûts d'antisélection plus élevés.

The primary focus of this paper is to study conflict of interest in the brokerage market. Brokers face a conflict of interest when the commissions they receive from investors differ from the costs imposed by different trading venues. I construct a model of limit order trading in which brokers serve as agents for investors who wish to access equity markets. I find that brokers preferentially route marketable orders to venues with lower liquidity demand fees, driving up the execution probability at these venues and lowering adverse selection costs. When fees for liquidity supply and demand are sufficiently different, brokers route liquidity supplying orders to separate venues, where investors suffer from lower execution probability and higher costs of adverse selection. Bank topics: Financial markets; Market structure and pricing JEL codes: G24; G28 Résumé Cet article étudie principalement les conflits d'intérêts dans le marché du courtage. Les courtiers se trouvent devant un conflit d'intérêts lorsque les commissions qu'ils reçoivent des investisseurs diffèrent des coûts qu'exigent les différentes plateformes de négociation. L'auteur construit un modèle de négociation d'ordres à cours limité dans lequel les courtiers servent d'intermédiaires aux investisseurs qui souhaitent accéder aux marchés boursiers. Il constate que les courtiers préfèrent acheminer les ordres négociables vers des plateformes dont les frais liés à la demande de liquidité sont moindres, ce qui augmente la probabilité d'exécution sur ces plateformes et réduit les coûts d'antisélection. Lorsque les frais associés à l'offre et à la demande de liquidité sont suffisamment différents, les courtiers transmettent les ordres favorisant l'offre de liquidité à des plateformes distinctes; ainsi, les investisseurs voient diminuer la probabilité d'exécution de leurs ordres et subissent des coûts d'antisélection plus élevés.

Latency delays-known as "speed bumps"-are an intentional slowing of order flow by exchanges. Supporters contend that delays protect market makers from high-frequency arbitrage, while opponents warn that delays promote "quote fading" by market makers. We construct a model of informed trading in a fragmented market, where one market operates a conventional order book and the other imposes a latency delay on market orders. We show that informed investors migrate to the conventional exchange, widening the quoted spread, while the quoted spread narrows at the delayed exchange. The overall market quality impact depends on the relative concentration of speculators who may become informed. If speculators are few relative to liquidity traders, total welfare falls; with relatively more speculators, total welfare rises.