Does Broker Competition in Liquidity Supply Matter?

Abstract

This study introduces a new variable that measures the level of broker competition in terms of posted depth at the market price provided by liquidity suppliers. This variable is measured by a Herfindahl index and is added to the price-impact model, thus allowing it to be used for forecasting because it is ex ante to the initial trade. The variable is found to be negatively related to price impact, which suggests that liquidity providers herd against an incoming trader who is looking to execute a series of orders.