The Impact of Dark and Visible Fragmentation on Market Quality (Replaces CentER Discussion Paper 2011-051)
AbstractTwo important characteristics of current European equity markets are rooted in changes in financial regulation (the Markets in Financial Instruments Directive). The regulation (i) allows new trading venues to emerge, generating a fragmented market place and (ii) allows for a substantial fraction of trading to take place in the dark, outside publicly displayed order books. This paper evaluates the impact on liquidity of fragmentation in visible order books and dark trading for a sample of 52 Dutch stocks. We consider global liquidity by consolidating the entire limit order books of all visible European trading venues, and local liquidity by considering the traditional market only. We find that fragmentation in visible order books improves global liquidity, but dark trading has a detrimental effect. In addition, local liquidity is lowered by fragmentation in visible order books.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-069.
Date of creation: 2011
Date of revision:
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Web page: http://center.uvt.nl
Market microstructure; Market fragmentation; Liquidity; MiFID;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-02 (All new papers)
- NEP-CFN-2011-07-02 (Corporate Finance)
- NEP-MST-2011-07-02 (Market Microstructure)
- NEP-REG-2011-07-02 (Regulation)
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