Fragmentation Under High Frequency Trading: Theory and Evidence
24 Pages Posted: 9 Aug 2018 Last revised: 14 Oct 2018
Date Written: September 28, 2018
I investigate the fragmentation under high frequency trading (HFT) popularity. I make a toy model of security exchange market competition. With the friction like the Bertrand competition with differentiated goods, the effect of the number of venues on bid ask spread depends on the business stealing effect. Using Nikkei 225 future's data and focusing on the system down of Singapore Exchange as a natural experiment, I show the smaller number of venues means larger bid ask spread. When we think about welfare loss both from HFT investment and the effect of bid ask spread, the relationship between the number of venues and welfare is vague.
Keywords: Fragmentation, High Frequency Trading, Continuous Limit Order Book, Batch Auction
JEL Classification: D44, D47, G14, G18
Suggested Citation: Suggested Citation