Market Fragmentation: Assessments and Prospects

This paper provides an overview of the knowledge available to date on market fragmentation and its consequences, with a specific focus on the European experience. Since the implementation of MiFID1 on 1 November 2007, market fragmentation has considerably increased in European stock markets without however reaching the same level as in the U.S. At present, in Europe, three trading platforms have become significant players and their joint market share exceeds 30% of lit trading volumes. Regulated dark pools do not execute more than some 5% of the total trading volumes. In contrast, OTC trading makes a large share of total volumes. The empirical evidence converges to show that fragmentation has generally contributed to improving liquidity with greater benefits for global traders who connect to several platforms and greater liquidity gains on large capitalization stocks. Adverse effects on the depth of small stocks may be observed locally in their primary market but they are more the outcome of algorithmic trading than that of fragmentation. Further, while dark trading in crossing engines is shown to improve liquidity, the impact of OTC trading is mixed and the lack of strong conclusion on this issue leaves room for further research. Finally, price quality does not appear to be significantly affected by market fragmentation in European stock markets.