The Impact of Dark Trading and Visible Fragmentation on Market Quality
Frank De Jong
Tilburg University - Department of Finance
KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)
Vincent van Kervel
Pontifical Catholic University of Chile; Tilburg Law and Economics Center (TILEC)
CEPR Discussion Paper No. DP8630
Two important characteristics of current equity markets are the large number of trading venues with publicly displayed order books and the substantial fraction of trading that takes place in the dark, outside such visible order books. This paper evaluates the impact of dark trading and fragmentation in visible order books on liquidity. We consider global liquidity by consolidating the limit order books of all visible trading venues, and local liquidity by considering the traditional market only. We find that fragmentation in visible order books improves global liquidity, whereas dark trading has a detrimental effect. In addition, local liquidity is lowered by fragmentation in visible order books, which suggests that the benefits of fragmentation are not enjoyed by market participants who resort only to the traditional market.
Number of Pages in PDF File: 53
Keywords: dark trading, fragmentation, liquidity, market microstructure
JEL Classification: G10, G14, G15
Date posted: November 24, 2011
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