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Market Fragmentation and Information Quality: The Role of TRF TradesChristine X. JiangUniversity of Memphis - Fogelman College of Business and Economics Thomas H. McInishUniversity of Memphis - Fogelman College of Business and Economics James UpsonUniversity of Texas at El Paso March 26, 2012 Abstract: We analyze and compare the information quality of order flows on the exchange and on off-exchange venues reported to Trade Reporting Facilities. Compared to exchange order flow, we find that off-exchange order flow has significantly lower information quality, including a lower information ratio and a lower price impact, and a significantly higher percentage of trades executing inside the quote. Our results are consistent with the notion that the segmentation of uninformed liquidity traders in off-exchange venues so that there is a higher proportion of informed traders on the exchanges, leads to an improvement in price discovery and information quality on the exchanges. Use of off-exchange venues is higher with increased market speed and trading intensity, but decreases with higher intraday volatility.
Number of Pages in PDF File: 46 Keywords: Fragmentation, Market Quality, Off-exchange trading JEL Classification: G14, G18, G19 working papers seriesDate posted: November 16, 2011 ; Last revised: March 27, 2012Suggested CitationContact Information
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