Is Market Fragmentation Harming Market Quality?

42 Pages Posted: 12 Mar 2009  

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Mao Ye

Hewlett-Packard Laboratories

Date Written: March 10, 2009

Abstract

Equity markets world-wide have seen a proliferation of trading venues and the consequent fragmentation of order flow. In this paper, we examine how fragmentation of trading is affecting the quality of trading in U.S. markets. We propose using newly-available TRF (trade reporting facilities) volumes to proxy for fragmentation levels in individual stocks, and we use a matched sample to compare execution quality and efficiency of stocks with more and less fragmented trading. We find that market fragmentation generally reduces transactions costs and increases execution speeds. Fragmentation does increase short-term volatility, but prices are more efficient in that they are closer to being a random walk. Our results that fragmentation does not appear to harm market quality have important implications for regulatory policy.

Keywords: market fragmentation, market quality, microstructure

JEL Classification: G14, G18, D40

Suggested Citation

O'Hara, Maureen and Ye, Mao, Is Market Fragmentation Harming Market Quality? (March 10, 2009). Available at SSRN: https://ssrn.com/abstract=1356839 or http://dx.doi.org/10.2139/ssrn.1356839

Maureen O'Hara (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Mao Ye

Hewlett-Packard Laboratories ( email )

1501 Page Mill Road
Palo Alto, CA 94304
United States

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