Order Flow Fragmentation and Flight-To-Transparency during Stressed Market Conditions: Evidence from COVID-19

Posted: 17 Jun 2021

See all articles by Giulio Anselmi

Giulio Anselmi

Catholic University of the Sacred Heart of Milan

Giovanni Petrella

Università Cattolica del Sacro Cuore

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: April 15, 2021

Abstract

The proliferation of trading venues has resulted in a fragmented secondary markets landscape both in the US and Europe. Different factors drive the fragmentation of order flow during normal market conditions. This paper studies the composition of order flow during stressed market conditions based on the COVID-19 outbreak. We specifically investigate two related questions. Firstly, we assess whether stressed market conditions alter the level of fragmentation and, secondly, we study the choice of lit vs. dark trading when markets are under stress. As for the first question, we construct a measure to capture order flow fragmentation and find that fragmentation strongly decreases when markets are under stress (i.e., traders concentrate their order flow in fewer venues in times of market stress). This is especially the case for stocks experiencing a deeper shock in volatility. As for the second question, we find a migration of order flow from dark to lit venues when markets are under stress. Our interpretation of this finding is that traders tend to move to lit venues, where the probability of trading with an informed trader is less severe, during times of hyper-volatility. We call this evidence ’flight-to-transparency’.

Keywords: COVID-19, Fragmentation, Dark trading, Stressed market conditions

JEL Classification: G14, G24, G28

Suggested Citation

Anselmi, Giulio and Petrella, Giovanni and Nimalendran, Mahendrarajah, Order Flow Fragmentation and Flight-To-Transparency during Stressed Market Conditions: Evidence from COVID-19 (April 15, 2021). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3864104

Giulio Anselmi

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Giovanni Petrella (Contact Author)

Università Cattolica del Sacro Cuore ( email )

Largo Gemelli 1
Milano, 20123
Italy
+39 02 72343007 (Phone)

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9526 (Phone)
352-392-0301 (Fax)

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