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The Effect of Fragmentation in Trading on Market Quality in the UK Equity Market

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  • Lena Körber
  • Oliver Linton
  • Michael Vogt

Abstract

We investigate the effects of fragmentation in equity markets on the quality of trading outcomes in a panel of FTSE stocks over the period 2008-2011. This period coincided with a great deal of turbulence in the UK equity markets which had multiple causes that need to be controlled for. To achieve this, we use the common correlated effects estimator for large heterogeneous panels. We extend this estimator to quantile regression to analyze the whole conditional distribution of market quality. We find that both fragmentation in visible order books and dark trading that is offered outside the visible order book lower volatility. But dark trading increases the variability of volatility, while visible fragmentation has the opposite effect in particular at the upper quantiles of the conditional distribution. The transition from a monopolistic to a fragmented market is non-monotone.

Suggested Citation

  • Lena Körber & Oliver Linton & Michael Vogt, 2014. "The Effect of Fragmentation in Trading on Market Quality in the UK Equity Market," Cambridge Working Papers in Economics 1454, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1454
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Vogt & Oliver Linton, 2015. "Classification of nonparametric regression functions in heterogeneous panels," CeMMAP working papers 06/15, Institute for Fiscal Studies.
    2. Bernales, Alejandro & Ladley, Daniel & Litos, Evangelos & Valenzuela, Marcela, 2021. "Dark trading and alternative execution priority rules," LSE Research Online Documents on Economics 118866, London School of Economics and Political Science, LSE Library.
    3. Bada, O. & Kneip, A. & Liebl, D. & Mensinger, T. & Gualtieri, J. & Sickles, R.C., 2022. "A wavelet method for panel models with jump discontinuities in the parameters," Journal of Econometrics, Elsevier, vol. 226(2), pages 399-422.
    4. Vogt, Michael & Linton, Oliver, 2020. "Multiscale clustering of nonparametric regression curves," Journal of Econometrics, Elsevier, vol. 216(1), pages 305-325.
    5. Aghanya, Daniel & Agarwal, Vineet & Poshakwale, Sunil, 2020. "Market in Financial Instruments Directive (MiFID), stock price informativeness and liquidity," Journal of Banking & Finance, Elsevier, vol. 113(C).
    6. Sinem Hacıoğlu Hoke & George Kapetanios, 2021. "Common correlated effect cross‐sectional dependence corrections for nonlinear conditional mean panel models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(1), pages 125-150, January.
    7. Ye, Xiaoqing & Xu, Juan & Wu, Xiangjun, 2018. "Estimation of an unbalanced panel data Tobit model with interactive effects," Journal of choice modelling, Elsevier, vol. 28(C), pages 108-123.
    8. Costa, Geraldo Jr. & Trujillo-Barrera, Andres & Pennings, Joost M.E., 2018. "Concentration and Liquidity Costs in Emerging Commodity Exchanges," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 43(3), September.
    9. Lausen, Jens & Clapham, Benjamin & Gomber, Peter & Bender, Micha, 2022. "Drivers and effects of stock market fragmentation - Insights on SME stocks," SAFE Working Paper Series 367, Leibniz Institute for Financial Research SAFE.
    10. Anna Pomeranets & Daniel G. Weaver, 2024. "Forced consolidation," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 579-601, February.
    11. Paulo Pereira Silva, 2018. "Fragmentation and Market Quality: The Case of European Markets," De Economist, Springer, vol. 166(2), pages 179-206, June.
    12. Suchismita Mishra & Le Zhao, 2021. "Order Routing Decisions for a Fragmented Market: A Review," JRFM, MDPI, vol. 14(11), pages 1-32, November.
    13. Brugler, James, 2015. "Into the light: dark pool trading and intraday market quality on the primary exchange," Bank of England working papers 545, Bank of England.
    14. Daniel Chen & Darrell Duffie, 2020. "Market Fragmentation," NBER Working Papers 26828, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Heterogeneous panel data; quantile regression; MiFID; dark pools; high frequency trading;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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