The Effect of Fragmentation in Trading on Market Quality in the UK Equity Market

79 Pages Posted: 26 Aug 2013 Last revised: 27 Aug 2013

See all articles by Lena Koerber

Lena Koerber

London School of Economics & Political Science (LSE)

Oliver B. Linton

University of Cambridge

Michael Vogt

University of Cambridge

Date Written: August 26, 2013

Abstract

We investigate the effects of fragmentation of equity trading on the quality of the trading outcomes specifically, volatility, liquidity and volume. We use panel regression methods on a weekly dataset following the FTSE350 stocks over the period 2008-2011, which provides a lot of cross-sectional and time series variation in fragmentation. This period coincided with a great deal of turbulence in the UK equity markets which had multiple causes that need to be controlled for. To achieve this, we use a version of the common correlated effects estimator (Pesaran, 2006). One finding is that volatility is lower in a fragmented market when compared to a monopoly. Trading volume at the London Stock Exchange is lower too, but global trading volume is higher if order flow is fragmented across multiple venues. When separating overall fragmentation into visible fragmentation and dark reading, we find that the decline in LSE volume can be attributed to visible fragmentation, while the increase in global volume is due to dark trading.

Keywords: Dark Pools, Heterogenous panel data, High Frequency Trading, quantile regression, MiFID

JEL Classification: C23, G28, L10

Suggested Citation

Koerber, Lena and Linton, Oliver B. and Vogt, Michael, The Effect of Fragmentation in Trading on Market Quality in the UK Equity Market (August 26, 2013). Available at SSRN: https://ssrn.com/abstract=2315484 or http://dx.doi.org/10.2139/ssrn.2315484

Lena Koerber (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

Michael Vogt

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

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