IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v100y2011i3p459-474.html
   My bibliography  Save this article

Is market fragmentation harming market quality?

Author

Listed:
  • O'Hara, Maureen
  • Ye, Mao

Abstract

We examine how fragmentation is affecting market quality in US equity markets. We use newly available trade reporting facilities (TRFs) data to measure fragmentation, and we use a variety of empirical approaches to compare execution quality and efficiency of stocks with more and less fragmented trading. We find that fragmentation affects all stocks; more fragmented stocks have lower transactions costs and faster execution speeds; and fragmentation is associated with higher short-term volatility but greater market efficiency, in that prices are closer to being a random walk. Our results that fragmentation does not appear to harm market quality are consistent with US markets being a single virtual market with multiple points of entry.

Suggested Citation

  • O'Hara, Maureen & Ye, Mao, 2011. "Is market fragmentation harming market quality?," Journal of Financial Economics, Elsevier, vol. 100(3), pages 459-474, June.
    • Handle: RePEc:eee:jfinec:v:100:y:2011:i:3:p:459-474
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(11)00039-0
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Madhavan, Ananth, 1995. "Consolidation, Fragmentation, and the Disclosure of Trading Information," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 579-603.
    2. Biais, Bruno, 1993. "Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, vol. 48(1), pages 157-185, March.
    3. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    4. Terrence Hendershott & Haim Mendelson, 2000. "Crossing Networks and Dealer Markets: Competition and Performance," Journal of Finance, American Finance Association, vol. 55(5), pages 2071-2115, October.
    5. Madhavan, Ananth & Cheng, Minder, 1997. "In Search of Liquidity: Block Trades in the Upstairs and Downstairs Markets," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 175-203.
    6. Goldstein, Michael A. & Shkilko, Andriy V. & Van Ness, Bonnie F. & Van Ness, Robert A., 2008. "Competition in the market for NASDAQ securities," Journal of Financial Markets, Elsevier, vol. 11(2), pages 113-143, May.
    7. Thierry Foucault & Albert J. Menkveld, 2008. "Competition for Order Flow and Smart Order Routing Systems," Journal of Finance, American Finance Association, vol. 63(1), pages 119-158, February.
    8. Macey, Jonathan R & O'Hara, Maureen, 1999. "Regulating Exchanges and Alternative Trading Systems: A Law and Economics Perspective," The Journal of Legal Studies, University of Chicago Press, vol. 28(1), pages 17-54, January.
    9. Marco Pagano, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 255-274.
    10. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    11. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    12. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    13. Bessembinder, Hendrik & Kaufman, Herbert M., 1997. "A cross-exchange comparison of execution costs and information flow for NYSE-listed stocks," Journal of Financial Economics, Elsevier, vol. 46(3), pages 293-319, December.
    14. Mendelson, Haim, 1987. "Consolidation, Fragmentation, and Market Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(2), pages 189-207, June.
    15. Boehmer, Ekkehart, 2005. "Dimensions of execution quality: Recent evidence for US equity markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 553-582, December.
    16. Bessembinder, Hendrik, 2003. "Trade Execution Costs and Market Quality after Decimalization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(4), pages 747-777, December.
    17. Boehmer, Beatrice & Boehmer, Ekkehart, 2003. "Trading your neighbor's ETFs: Competition or fragmentation?," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1667-1703, September.
    18. Bennett, Paul & Wei, Li, 2006. "Market structure, fragmentation, and market quality," Journal of Financial Markets, Elsevier, vol. 9(1), pages 49-78, February.
    19. Ekkehart Boehmer & Robert Jennings & Li Wei, 2007. "Public Disclosure and Private Decisions: Equity Market Execution Quality and Order Routing," Review of Financial Studies, Society for Financial Studies, vol. 20(2), pages 315-358.
    20. Bessembinder, Hendrik & Venkataraman, Kumar, 2004. "Does an electronic stock exchange need an upstairs market?," Journal of Financial Economics, Elsevier, vol. 73(1), pages 3-36, July.
    21. Hasbrouck, Joel, 1993. "Assessing the Quality of a Security Market: A New Approach to Transaction-Cost Measurement," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 191-212.
    22. Chowdhry, Bhagwan & Nanda, Vikram, 1991. "Multimarket Trading and Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 483-511.
    23. Hans R. Stoll, 2000. "Presidential Address: Friction," Journal of Finance, American Finance Association, vol. 55(4), pages 1479-1514, August.
    24. Amihud, Yakov & Lauterbach, Beni & Mendelson, Haim, 2003. "The Value of Trading Consolidation: Evidence from the Exercise of Warrants," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(4), pages 829-846, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Suchismita Mishra & Le Zhao, 2021. "Order Routing Decisions for a Fragmented Market: A Review," JRFM, MDPI, vol. 14(11), pages 1-32, November.
    2. Peter Gomber & Satchit Sagade & Erik Theissen & Moritz Christian Weber & Christian Westheide, 2017. "Competition Between Equity Markets: A Review Of The Consolidation Versus Fragmentation Debate," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 792-814, July.
    3. Carole Gresse, 2013. "Effects of Lit and Dark Trading Venue Competition on Liquidity : The MiFID Experience," Post-Print hal-01632517, HAL.
    4. repec:dau:papers:123456789/7685 is not listed on IDEAS
    5. 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.
    6. repec:dau:papers:123456789/8775 is not listed on IDEAS
    7. Haoyang Liu & Zhaogang Song & James Vickery, 2021. "Defragmenting Markets: Evidence from Agency MBS," Staff Reports 965, Federal Reserve Bank of New York.
    8. 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.
    9. Andreas Storkenmaier & Martin Wagener & Christof Weinhardt, 2012. "Public information in fragmented markets," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(2), pages 179-215, June.
    10. Degryse, H.A., 2007. "Competition on financial markets : Does market design matter?," Other publications TiSEM ee5530b2-34f7-4d95-ad62-f, Tilburg University, School of Economics and Management.
    11. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2023. "Spoilt for choice: Determinants of market shares in fragmented equity markets," Journal of Financial Markets, Elsevier, vol. 64(C).
    12. Kohler, Alexander & von Wyss, Rico, 2012. "Fragmentation in European Equity Markets and Market Quality – Evidence from the Analysis of Trade-Throughs," Working Papers on Finance 1210, University of St. Gallen, School of Finance.
    13. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    14. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2016. "Spoilt for choice: Order routing decisions in fragmented equity markets," CFR Working Papers 16-04, University of Cologne, Centre for Financial Research (CFR).
    15. Watson, Ethan D. & Woods, Donovan, 2022. "Exchange introduction and market competition: The entrance of MEMX and MIAX," Global Finance Journal, Elsevier, vol. 54(C).
    16. Paulo Pereira Silva, 2018. "Fragmentation and Market Quality: The Case of European Markets," De Economist, Springer, vol. 166(2), pages 179-206, June.
    17. Ende, Bartholomäus & Lutat, Marco, 2010. "Trade-throughs in European cross-traded equities after transaction costs: Empirical evidence for the EURO STOXX 50," CFS Working Paper Series 2010/15, Center for Financial Studies (CFS).
    18. Carole Gresse, 2017. "Effects of Lit and Dark Market Fragmentation on Liquidity," Post-Print hal-01631771, HAL.
    19. Clapham, Benjamin & Gomber, Peter & Panz, Sven, 2017. "Coordination of circuit breakers? Volume migration and volatility spillover in fagmented markets," SAFE Working Paper Series 196, Leibniz Institute for Financial Research SAFE.
    20. Hung, Pi-Hsia & Lien, Donald, 2019. "Trading aggressiveness, order execution quality, and stock price movements: Evidence from the Taiwan stock exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 60(C), pages 231-251.
    21. Carole Gresse, 2011. "Effects of Lit and Dark Market Fragmentation on Liquidity," Post-Print halshs-00641122, HAL.
    22. Jurich, Stephen N., 2021. "Does off-exchange trading decrease in the presence of uncertainty?," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 201-213.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:100:y:2011:i:3:p:459-474. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.