The Impact of Dark and Visible Fragmentation on Market Quality

H.A. Degryse, F.C.J.M. de Jong, V.L. van Kervel

Research output: Working paperDiscussion paperOther research output

Abstract

Two 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.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Volume2011-026
Publication statusPublished - 2011

Publication series

NameTILEC Discussion Paper
Volume2011-026

Fingerprint

Fragmentation
Market quality
Liquidity
Order book
Financial regulation
Financial instruments
Equity markets
Limit order book

Keywords

  • Market microstructure
  • Market fragmentation
  • Liquidity
  • MiFID

Cite this

Degryse, H. A., de Jong, F. C. J. M., & van Kervel, V. L. (2011). The Impact of Dark and Visible Fragmentation on Market Quality. (TILEC Discussion Paper; Vol. 2011-026). Tilburg: TILEC.
Degryse, H.A. ; de Jong, F.C.J.M. ; van Kervel, V.L. / The Impact of Dark and Visible Fragmentation on Market Quality. Tilburg : TILEC, 2011. (TILEC Discussion Paper).
@techreport{78ddfdcd9a96441fa8d0bf27afffb8a2,
title = "The Impact of Dark and Visible Fragmentation on Market Quality",
abstract = "Two 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.",
keywords = "Market microstructure, Market fragmentation, Liquidity, MiFID",
author = "H.A. Degryse and {de Jong}, F.C.J.M. and {van Kervel}, V.L.",
note = "This is also CentER Discussion Paper 2011-051",
year = "2011",
language = "English",
volume = "2011-026",
series = "TILEC Discussion Paper",
publisher = "TILEC",
type = "WorkingPaper",
institution = "TILEC",

}

Degryse, HA, de Jong, FCJM & van Kervel, VL 2011 'The Impact of Dark and Visible Fragmentation on Market Quality' TILEC Discussion Paper, vol. 2011-026, TILEC, Tilburg.

The Impact of Dark and Visible Fragmentation on Market Quality. / Degryse, H.A.; de Jong, F.C.J.M.; van Kervel, V.L.

Tilburg : TILEC, 2011. (TILEC Discussion Paper; Vol. 2011-026).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - The Impact of Dark and Visible Fragmentation on Market Quality

AU - Degryse, H.A.

AU - de Jong, F.C.J.M.

AU - van Kervel, V.L.

N1 - This is also CentER Discussion Paper 2011-051

PY - 2011

Y1 - 2011

N2 - Two 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.

AB - Two 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.

KW - Market microstructure

KW - Market fragmentation

KW - Liquidity

KW - MiFID

M3 - Discussion paper

VL - 2011-026

T3 - TILEC Discussion Paper

BT - The Impact of Dark and Visible Fragmentation on Market Quality

PB - TILEC

CY - Tilburg

ER -

Degryse HA, de Jong FCJM, van Kervel VL. The Impact of Dark and Visible Fragmentation on Market Quality. Tilburg: TILEC. 2011. (TILEC Discussion Paper).