A Decade in the Life of a Market: Visible Market Fragmentation, Quality and Efficiency

43 Pages Posted: 14 Mar 2016 Last revised: 16 May 2016

See all articles by Yuxin Sun

Yuxin Sun

Queen's University Belfast - Queen's Management School

Gbenga Ibikunle

University of Edinburgh; European Capital Markets Cooperative Research Centre

Date Written: April 11, 2016

Abstract

In contrast to the Reg NMS regime in the US, the European Markets in Financial Instruments Directive (MiFID) does not impose a formal exchange trading linkage or guarantee the best execution price. This raises concerns about consolidated market quality in an increasingly fragmented European trading environment. We investigate the impact of visible trading fragmentation on equity market quality on FTSE 100 stocks over the period 2004 to 2014. We find a U-shape relationship between fragmentation and adverse selection costs. At lower levels of fragmentation, order flow competition reduces adverse selection costs and improves market transparency. However, there is a fragmentation threshold where implied adverse selection costs could increase with visible fragmentation. Visible fragmentation also stimulates market efficiency by reducing arbitrage opportunities.

Keywords: MiFID, Multilateral Trading Facilities (MTFs), Market Transparency, Adverse Selection, Probability of informed trading (PIN), Market Efficiency

JEL Classification: G10, G14, G15

Suggested Citation

Sun, Yuxin and Ibikunle, Gbenga, A Decade in the Life of a Market: Visible Market Fragmentation, Quality and Efficiency (April 11, 2016). Available at SSRN: https://ssrn.com/abstract=2746535 or http://dx.doi.org/10.2139/ssrn.2746535

Yuxin Sun

Queen's University Belfast - Queen's Management School ( email )

Office 0G-018
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

Gbenga Ibikunle (Contact Author)

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

European Capital Markets Cooperative Research Centre ( email )

Viale Pidaro 42
Pescara, 65121
Italy

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