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

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