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The Impact of Dark Trading and Visible Fragmentation on Market Quality

44 Pages Posted: 19 May 2011 Last revised: 17 Feb 2014

Hans Degryse

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)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2014

Abstract

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.

Keywords: Market microstructure, Fragmentation, Dark trading, Liquidity

JEL Classification: G10, G14, G15

Suggested Citation

Degryse, Hans and De Jong, Frank and van Kervel, Vincent, The Impact of Dark Trading and Visible Fragmentation on Market Quality (January 2014). TILEC Discussion Paper No. 2011-026. Available at SSRN: https://ssrn.com/abstract=1815025 or http://dx.doi.org/10.2139/ssrn.1815025

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Frank De Jong

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Vincent Van Kervel

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, RegiĆ³n Metropolitana 8331150
Chile

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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