An Empirical Analysis of Market Segmentation on U.S. Equities Markets

82 Pages Posted: 7 Jun 2013 Last revised: 16 Nov 2014

See all articles by Frank Hatheway

Frank Hatheway

Nasdaq, Inc.

Amy Kwan

The University of New South Wales

Hui Zheng

Discipline of Finance, The University of Sydney; Capital Markets CRC Limited

Date Written: November 15, 2014

Abstract

We examine the impact of trading on markets partially exempt from National Market System requirements (‘dark venues’) on equity market quality. We find evidence consistent with the notion that dark venues rely on their special features to segregate order flow based on asymmetric information risk, which results in their transactions being less informed and contributing less to price discovery on the consolidated market. Except for the execution of large transactions and trading in small stocks, the effects of dark venue order segmentation are damaging to overall market quality. Our results have important implications for the regulation of international equity markets.

Keywords: Market Segmentation, Security Market Regulation, Market Efficiency

JEL Classification: G14

Suggested Citation

Hatheway, Frank and Kwan, Amy and Zheng, Hui, An Empirical Analysis of Market Segmentation on U.S. Equities Markets (November 15, 2014). Available at SSRN: https://ssrn.com/abstract=2275101 or http://dx.doi.org/10.2139/ssrn.2275101

Frank Hatheway

Nasdaq, Inc. ( email )

United States

Amy Kwan

The University of New South Wales ( email )

Sydney, NSW 2052
Australia
+61280884259 (Phone)

Hui Zheng (Contact Author)

Discipline of Finance, The University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 3915 (Phone)
+61 2 9351 6461 (Fax)

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

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