Why Do Markets Fragment? A Panel-Data Analysis of Off-Exchange Trading

47 Pages Posted: 8 Feb 2001

See all articles by Kingsley Y. L. Fong

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance; Financial Research Network (FIRN)

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Ananth Madhavan

BlackRock, Inc.

Date Written: March 2, 2001

Abstract

We use unique data from Australia to analyze the nature and determinants of order flow frag-mentation across all trades and every security traded. Our panel regression estimates shows that cross-sectional difference in off-market trading (ECNs, after-hours and upstairs trading alike) is driven by institutional trading interest (trading volume, indexation) and liquidity (bid-ask spread and market depth). At the transaction level, we study upstairs and primary downstairs block trades and find strong evidence that trade size, downstairs liquidity and a trader?s reputation af-fect his market selection decision. We conclude that there is significant competition between markets in highly liquid securities and their coexistence benefits those in a position to switch.

Keywords: Fragmentation, Off-Market Trading, Transparency, Anonymity, Electronic Communication Networks

JEL Classification: G14

Suggested Citation

Fong, Kingsley Y. L. and Swan, Peter Lawrence and Madhavan, Ananth, Why Do Markets Fragment? A Panel-Data Analysis of Off-Exchange Trading (March 2, 2001). EFA 0729. Available at SSRN: https://ssrn.com/abstract=246509 or http://dx.doi.org/10.2139/ssrn.246509

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Ananth Madhavan

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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