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Market Fairness: The Poor Country Cousin of Market Efficiency

61 Pages Posted: 23 May 2014 Last revised: 2 Apr 2015

Michael J. Aitken

Macquarie Graduate School of Management

Angelo Aspris

University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Sean Foley

University of Sydney

Frederick H. deB. Harris

Wake Forest University; Capital Markets CRC Limited (CMCRC)

Date Written: November 12, 2014


Notwithstanding that regulatory mandates require that all security market design changes pass the dual test of fairness and efficiency, most regulators have not even defined efficiency let alone fairness. It should therefore come as little surprise why design changes such as the introduction of algorithmic and high frequency trading or dark pools are causing considerable controversy in the marketplace. There is no evidence-based policy framework within which such changes can be meaningfully evaluated. In this work we seek to develop a Market Quality Framework in which as a start both fairness and efficiency are defined. From these definitions we establish a series of empirical proxies. Thereafter, we develop a systems estimation model and demonstrate its use by analyzing the 2004-2011 explosive growth in algorithmic trading (AT) on the London Stock Exchange and NYSE Euronext Paris. Our results show that greater AT increases market fairness and efficiency but only in top quintile stocks. We address the robustness of these results to end-of-quarter reporting deadlines and to trading before and after MiFID1, a 2007 regulatory regime that fragmented the market. In addition, we analyze the over-identifying restrictions, and perform both Hausman and Stock-Yogo tests of the exogeneity and strength of our AT instruments.

Keywords: Market integrity, market fairness, manipulation, information leakage, algorithmic trading

JEL Classification: G28

Suggested Citation

Aitken, Michael J. and Aspris, Angelo and Foley, Sean and Harris, Frederick H. deB., Market Fairness: The Poor Country Cousin of Market Efficiency (November 12, 2014). Available at SSRN: or

Michael J. Aitken

Macquarie Graduate School of Management ( email )

North Ryde
Sydney, New South Wales 2109

Angelo Aspris

University of Sydney - Discipline of Finance ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


Sean Foley

University of Sydney ( email )


Frederick (Rick) H. deB. Harris (Contact Author)

Wake Forest University ( email )

2601 Wake Forest Road
Babcock Graduate School of Management
Winston-Salem, NC 27109
United States
336-758-5112 (Phone)

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000

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