Fragmentation and Consolidation of Dark and Lit Order Books

39 Pages Posted: 3 Dec 2015

See all articles by Jay Majtyka

Jay Majtyka

Bond University

Thomas Henker

Bond University

Julia Henker

Bond University

Date Written: December 3, 2015

Abstract

Since the implementation of MiFID on November 1 2007 European financial markets have experienced fragmentation in displayed (lit) order books as well as an increase in the use of non-displayed (dark) liquidity. We empirically analyze the effects such events have on market quality. We find that increased competition for orders resulting from the fragmentation of the displayed liquidity market improves market quality in the form of tighter bid/ask spreads and lower transaction costs. Fragmentation between lit and dark order books has a negative impact on market quality as informative trades migrate from lit to dark order book markets leading to greater information asymmetry among market participants. This results in wider bid/ask spreads and greater price impacts as investor confidence in advertised prices decreases and depth moves further from the midpoint of the best bid/ask spread. Increased dark order book fragmentation negatively effects market quality in the form of wider quoted spreads, however the magnitude of the effect is minimal.

Keywords: Dark pools, off-exchange, fragmentation

JEL Classification: G12, G15, G18

Suggested Citation

Majtyka, Jaroslaw and Henker, Thomas and Henker, Julia, Fragmentation and Consolidation of Dark and Lit Order Books (December 3, 2015). 7th Australasian Actuarial Education and Research Symposium. Available at SSRN: https://ssrn.com/abstract=2698734 or http://dx.doi.org/10.2139/ssrn.2698734

Jaroslaw Majtyka (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
Australia

Thomas Henker

Bond University ( email )

Gold Coast, QLD 4229
Australia
+61 7 5595-1561 (Phone)

Julia Henker

Bond University ( email )

Gold Coast, QLD 4229
Australia

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