The Impact of Dark Trading and Visible Fragmentation on Market Quality
Forthcoming in the Review of Finance
CentER Discussion Paper Series No. 2011-069
44 Pages Posted: 25 Apr 2011 Last revised: 14 Jun 2014
There are 2 versions of this paper
The Impact of Dark Trading and Visible Fragmentation on Market Quality
The Impact of Dark Trading and Visible Fragmentation on Market Quality
Date Written: January 1, 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: Suggested Citation
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