The Causal Impact of Market Fragmentation on Liquidity

52 Pages Posted: 10 Apr 2015 Last revised: 21 Jan 2017

See all articles by Peter H. Haslag

Peter H. Haslag

Vanderbilt University - Finance

Matthew Ringgenberg

University of Utah - Department of Finance

Date Written: November 14, 2016

Abstract

We estimate the causal impact of market fragmentation. Theoretically, more exchange competition should reduce trading costs, however it may also generate negative network externalities which reduce market quality. We document evidence of both effects, however our results show differential impacts for large and small stocks. For large stocks, the former effect dominates and market quality is better. For small stocks, negative network externalities dominate and market quality is relatively worse. In response, we find that traders use inter-market sweep orders to avoid negative network externalities. Our results reconcile conflicting findings in the literature and show that fragmentation has dramatically changed U.S. markets.

Keywords: Exchange competition, fragmentation, liquidity, market microstructure

JEL Classification: G12, G14

Suggested Citation

Haslag, Peter H. and Ringgenberg, Matthew C., The Causal Impact of Market Fragmentation on Liquidity (November 14, 2016). Fourth Annual Conference on Financial Market Regulation. Available at SSRN: https://ssrn.com/abstract=2591715 or http://dx.doi.org/10.2139/ssrn.2591715

Peter H. Haslag

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

HOME PAGE: http://https://www.sites.google.com/site/peterhaslag/

Matthew C. Ringgenberg (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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