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The Off Exchange Routing Decision

A rising fraction of U.S. equity trading volume is being executed away from the national stock exchanges on the over-the-counter (OTC) market. This paper develops a theoretical model of the decision to route off-exchange to either alternative trading systems (ATS) platforms and OTC non-ATS dealers for executions. Using data from the Financial Industry Regulatory Authority, we compute weekly time series of market shares for all ATS and OTC non-ATS trading centers at the individual stock level in the period of April 4, 2016 - June 30, 2018. We test the model, using a panel-data instrumental variable approach, and confirm that both ATS and OTC non-ATS market shares increase with bid-ask spreads, decrease with on-exchange depth, and decrease with volatility. We extend our model to allow for heterogeneity, grouping venues by the probability of finding off-exchange liquidity. When we estimate our model within trade intensity groups, we find that ATS or OTC non-ATS trading centers respond more elastically to exchange liquidity conditions