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The Impact of Dark Trading and Visible Fragmentation on Market Quality

Forthcoming in the Review of Finance

CentER Discussion Paper Series No. 2011-069

European Banking Center Discussion Paper No. 2011-016

44 Pages Posted: 25 Apr 2011 Last revised: 14 Jun 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 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

Degryse, Hans and De Jong, Frank and van Kervel, Vincent, The Impact of Dark Trading and Visible Fragmentation on Market Quality (January 1, 2014). Forthcoming in the Review of Finance; CentER Discussion Paper Series No. 2011-069; European Banking Center Discussion Paper No. 2011-016. Available at SSRN: https://ssrn.com/abstract=1816434 or http://dx.doi.org/10.2139/ssrn.1816434

Hans Degryse

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 (Contact Author)

Pontifical Catholic University of Chile ( email )

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

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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