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Short‐ and Long‐Term Effects of Multimarket Trading

Author

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  • Vanthuan Nguyen
  • Bonnie F. Van Ness
  • Robert A. Van Ness

Abstract

We analyze short‐ and long‐term effects of multimarket trading by examining the entries of multiple markets into transacting three ETFs, DIA, QQQ, and SPY. We find that large‐scale entries improve overall market quality, while small‐scale entries have ambiguous effects. Our results show that the competition effect dominates the fragmentation effect over a long horizon and that market fragmentation leads to a decline in trading costs. Further, we find that the order handling rules help mitigate the fragmentation effect and facilitate the competition effect. We do not find that multimarket trading harms price efficiency or increases price volatility.

Suggested Citation

  • Vanthuan Nguyen & Bonnie F. Van Ness & Robert A. Van Ness, 2007. "Short‐ and Long‐Term Effects of Multimarket Trading," The Financial Review, Eastern Finance Association, vol. 42(3), pages 349-372, August.
    • Handle: RePEc:bla:finrev:v:42:y:2007:i:3:p:349-372
    DOI: 10.1111/j.1540-6288.2007.00175.x
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    Cited by:

    1. Shank, Corey A. & Vianna, Andre C., 2016. "Are US-Dollar-Hedged-ETF investors aggressive on exchange rates? A panel VAR approach," Research in International Business and Finance, Elsevier, vol. 38(C), pages 430-438.
    2. repec:dau:papers:123456789/7685 is not listed on IDEAS
    3. Caglio, Cecilia & Mayhew, Stewart, 2016. "Equity trading and the allocation of market data revenue," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 97-111.
    4. Burchan Sakarya & Aykut Ekinci, 2020. "Exchange-traded funds and FX volatility: Evidence from Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(4), pages 205-211.
    5. repec:dau:papers:123456789/8775 is not listed on IDEAS
    6. Chen, Jing & Dong, Yizhe & Hou, Wenxuan & McMillan, David G., 2018. "Does feedback trading drive returns of cross-listed shares?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 179-199.
    7. Bernales, Alejandro & Garrido, Nicolás & Sagade, Satchit & Valenzuela, Marcela & Westheide, Christian, 2020. "Trader Competition in Fragmented Markets: Liquidity Supply versus Picking-off Risk," SAFE Working Paper Series 234, Leibniz Institute for Financial Research SAFE, revised 2020.
    8. Markus Baldauf & Joshua Mollner, 2015. "Trading in Fragmented Markets," Discussion Papers 15-018, Stanford Institute for Economic Policy Research.
    9. Carole Gresse, 2011. "Effects of Lit and Dark Market Fragmentation on Liquidity," Post-Print halshs-00641122, HAL.
    10. Gresse, Carole, 2017. "Effects of lit and dark market fragmentation on liquidity," Journal of Financial Markets, Elsevier, vol. 35(C), pages 1-20.
    11. Carole Gresse, 2017. "Effects of Lit and Dark Market Fragmentation on Liquidity," Post-Print hal-01631771, HAL.
    12. Carole Gresse, 2013. "Effects of Lit and Dark Trading Venue Competition on Liquidity : The MiFID Experience," Post-Print hal-01632517, HAL.

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