The Impact of Dark Trading and Visible Fragmentation on Market Quality
KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)
Frank De Jong
Tilburg University - Department of Finance
Vincent Van Kervel
Pontifical Catholic University of Chile; Tilburg Law and Economics Center (TILEC)
TILEC Discussion Paper No. 2011-026
Two important characteristics of current equity markets are the large number of competing trading venues with publicly displayed order books and the substantial fraction of dark trading, which takes place outside such visible order books. This paper evaluates the impact on liquidity of dark trading and fragmentation in visible order books. Dark trading has a detrimental effect on liquidity. Visible fragmentation improves liquidity aggregated over all visible trading venues but lowers liquidity at the traditional market, meaning that the benefits of fragmentation are not enjoyed by investors who choose to send orders only to the traditional market.
Number of Pages in PDF File: 44
Keywords: Market microstructure, Fragmentation, Dark trading, Liquidity
JEL Classification: G10, G14, G15
Date posted: May 19, 2011 ; Last revised: February 17, 2014
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