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Market Fragmentation and Information Quality: The Role of TRF Trades

46 Pages Posted: 16 Nov 2011 Last revised: 10 Feb 2014

Christine X. Jiang

University of Memphis - Fogelman College of Business and Economics

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

James Upson

University of Texas at El Paso

Date Written: March 26, 2012

Abstract

We analyze and compare the information quality of order flows on the exchange and on off-exchange venues reported to Trade Reporting Facilities. Compared to exchange order flow, we find that off-exchange order flow has significantly lower information quality, including a lower information ratio and a lower price impact, and a significantly higher percentage of trades executing inside the quote. Our results are consistent with the notion that the segmentation of uninformed liquidity traders in off-exchange venues so that there is a higher proportion of informed traders on the exchanges, leads to an improvement in price discovery and information quality on the exchanges. Use of off-exchange venues is higher with increased market speed and trading intensity, but decreases with higher intraday volatility.

Keywords: Fragmentation, Market Quality, Off-exchange trading

JEL Classification: G14, G18, G19

Suggested Citation

Jiang, Christine X. and McInish, Thomas H. and Upson, James, Market Fragmentation and Information Quality: The Role of TRF Trades (March 26, 2012). Available at SSRN: https://ssrn.com/abstract=1960115 or http://dx.doi.org/10.2139/ssrn.1960115

Christine X. Jiang

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678¿5315 (Phone)
901-678¿2685 (Fax)

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

James Upson (Contact Author)

University of Texas at El Paso ( email )

500 West University
El Paso, TX 79968-0545
United States

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