Exchange Entrances, Mergers and the Evolution of Order Flow on NASDAQ 1993-2010

We examine the changes in order flow on NASDAQ from 1993 through 2010. We find that while volume and the number of trades are increasing for NASDAQ-listed securities, the percentage of volume that executes on NASDAQ declines from almost 100% in the 1990’s to less than 40% in 2010. We examine the entrants of new exchanges on NASDAQ and the merger of NASDAQ and several exchanges. We do not find that either entrants of new trading venues of the merging of trading venues leads to a change in total volume of securities executed. We find that the number of trading locations increases trading costs, but as order flow becomes more fragmented, trading costs decline. We see that as order flow fragments on NASDAQ, the speed of execution increases, and find little relation between the number of exchange/venues that trade NASDAQ stocks and the speed of execution. We also document a large increase in the number of cancelled orders for NASDAQ-listed securities, and this is increasing over time.