Fragmentation and Price Discovery: A Comparison of Reg NMS and MiFID1

Posted: 21 May 2019

See all articles by Frederick H. deB. Harris

Frederick H. deB. Harris

Wake Forest University; Capital Markets CRC Limited (CMCRC)

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Frank Sensenbrenner

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Robert Wood

University of Memphis - Fogelman College of Business and Economics

Date Written: August 7, 2014

Abstract

We study NYSE, NASDAQ, and ARCA prices for DJIA stocks and LSE, Xetra, and Chi-X prices for five leading British equities. MiFID1 hastened fragmentation but accomplished the intended cointegration of European equity markets that had previously been segmented. Initially, price discovery in London was largely unaffected; permanent quote innovations remained more than ninety percent attributable to the LSE. However, clearing and settlement fee reductions by Chi-X five months later did result in a substantial reduction in the information impounding and price discovery efficiency of London Stock Exchange trades. The contemporaneous situation in the U.S. with the implementation of Reg NMS was quite different. During its staggered rollout in 2007, NYSE’s price discovery declined steadily from 74% to 41% with much of that role migrating to ARCA. In this case, the price discovery efficiency of NASDAQ substantially improved.

Keywords: Reg NMS, MiFID1, fragmentation, Chi-X, ARCA, price discovery

JEL Classification: G12

Suggested Citation

Harris, Frederick (Rick) H. deB. and McInish, Thomas H. and Sensenbrenner, Frank and Wood, Robert A., Fragmentation and Price Discovery: A Comparison of Reg NMS and MiFID1 (August 7, 2014). https://doi.org/10.3905/jot.2014.9.4.006. Available at SSRN: https://ssrn.com/abstract=2473703 or http://dx.doi.org/10.2139/ssrn.2473703

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
Australia

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

Frank Sensenbrenner

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

Robert A. Wood

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-2670 (Phone)
901-678-3006 (Fax)

HOME PAGE: http://www.people.memphis.edu/~rwood/

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