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Fragmentation and Market Quality: The Case of European Markets

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  • Paulo Pereira Silva

    (CEFAGE, Universidade de Évora Palácio do Vimioso
    CMVM, Portuguese Securities Commission)

Abstract

This paper questions whether the proliferation of alternative trading venues in Western Europe after MiFID implementation in 2007 affected market quality. By means of a difference-in-differences analysis, we evaluate changes in market quality of stocks that initiated trading in Multilateral Trading Facilities (MTF) in relation to matched samples. Our analysis provides evidence that the overall liquidity (measured by transaction costs and price impact) and trading activity increased in the short term with trade initiation in MTF. Notably, we show that fragmentation did not cause lower price precision or informativeness, but some tests suggest that fragmentation correlates positively with volatility. The results of this study are stronger for stocks with greater propensity for MTF trade initiation, i.e. stocks with greater size and liquidity prior to that event. Interestingly, the impact on liquidity and trading activity varied across stock exchanges and timing of MTF trade initiation. As for long run effects, our results suggest an improvement of overall liquidity and a neutral effect on the trading activity of traditional exchanges.

Suggested Citation

  • Paulo Pereira Silva, 2018. "Fragmentation and Market Quality: The Case of European Markets," De Economist, Springer, vol. 166(2), pages 179-206, June.
    • Handle: RePEc:kap:decono:v:166:y:2018:i:2:d:10.1007_s10645-018-9316-0
    DOI: 10.1007/s10645-018-9316-0
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    More about this item

    Keywords

    Market fragmentation; Market quality; Liquidity; Price informativeness;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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