Effects of Lit and Dark Market Fragmentation on Liquidity
Journal of Financial Markets, forthcoming
63 Pages Posted: 30 Aug 2011 Last revised: 2 Mar 2017
Date Written: February 25, 2017
Based on data from eight exchanges and a trade reporting facility for a large sample of LSE- and Euronext-listed equities, this article investigates how lit and dark market fragmentation affects liquidity. Neither dark trading, nor fragmentation between lit order books, is found to harm liquidity. Lit fragmentation improves spreads and depth across markets and locally on the primary exchange, or at worst does not affect them. Benefits are greater for large stocks and stocks with less electronic trading. Lit fragmentation however harms the depth of small stocks. Adverse effects on the depth of large stocks result from algorithmic trading and not from fragmentation.
Keywords: Fragmentation, Liquidity, Multilateral Trading Facility (MTF), OTC trading, Internalization, Dark trading
JEL Classification: G14, G15, G18
Suggested Citation: Suggested Citation