Market Structure, Fragmentation and Market Quality - Evidence from Recent Listing Switches

Abstract

Have structural changes in the U.S. equities markets, such as decimalization, the growth of ECNs, and the improvements in order routing technologies altered the advantages of stock exchange relative to decentralized dealer and ECN trading? We examine market quality for companies that recently switch listings from Nasdaq to the NYSE. We find these stocks show significant reductions in return volatilities and price reversals, quoted spreads, and trading costs. The improvements are greater for companies whose pre-switch order flows are more fragmented, consistent with the notion that order flow consolidation improves market quality. Our findings are not influenced by sample selection bias.

Keywords: Market Fragmentation, Market Quality, Best Execution

JEL Classification: G23, G24