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The Impact of Dark Trading and Visible Fragmentation on Market Quality

53 Pages Posted: 24 Nov 2011  

Frank De Jong

Tilburg University - Department of Finance

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Vincent van Kervel

Pontifical Catholic University of Chile; Tilburg Law and Economics Center (TILEC)

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

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

Frank De Jong (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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

Vincent Van Kervel

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, RegiĆ³n Metropolitana 8331150
Chile

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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