The Impact of Dark Trading and Visible Fragmentation on Market Quality

De Jong, Frank; Degryse, Hans; van Kervel, Vincent

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The Impact of Dark Trading and Visible Fragmentation on Market Quality

CEPR Discussion Paper No. DP8630

53 Pages Posted: 24 Nov 2011

See all articles by Frank De Jong

Frank De Jong

Tilburg University - Department of Finance

Hans Degryse

KU Leuven - Faculty of Business and Economics (FEB)

Vincent van Kervel

Pontificia Universidad Católica de Chile

Date Written: November 2011

Abstract

Two important characteristics of current equity markets are the large number of trading venues with publicly displayed order books and the substantial fraction of trading that takes place in the dark, outside such visible order books. This paper evaluates the impact of dark trading and fragmentation in visible order books on liquidity. We consider global liquidity by consolidating the limit order books of all visible trading venues, and local liquidity by considering the traditional market only. We find that fragmentation in visible order books improves global liquidity, whereas dark trading has a detrimental effect. In addition, local liquidity is lowered by fragmentation in visible order books, which suggests that the benefits of fragmentation are not enjoyed by market participants who resort only to the traditional market.

Keywords: dark trading, fragmentation, liquidity, market microstructure

JEL Classification: G10, G14, G15

Suggested Citation: Suggested Citation

De Jong, Frank and Degryse, Hans and van Kervel, Vincent, The Impact of Dark Trading and Visible Fragmentation on Market Quality (November 2011). CEPR Discussion Paper No. DP8630, Available at SSRN: https://ssrn.com/abstract=1964120