The Effect of Fragmentation in Trading on Market Quality in the UK Equity Market
Monday 24th February 2014
CINET:
1405
Körber, L., Linton, O. and Vogt, M.
We investigate the effects of fragmentation in equity markets on the quality of trading outcomes in a
panel of FTSE stocks over the period 2008-2011. This period coincided with a great deal of turbulence
in the UK equity markets which had multiple causes that need to be controlled for. To achieve this, we
use the common correlated effects estimator for large heterogeneous panels. We extend this
estimator to quantile regression to analyze the whole conditional distribution of market quality. We
find that both fragmentation in visible order books and dark trading that is offered outside the visible
order book lower volatility. But dark trading increases the variability of volatility, while visible
fragmentation has the opposite effect in particular at the upper quantiles of the conditional
distribution. The transition from a monopolistic to a fragmented market is non-monotone.
Keywords
Heterogeneous panel data
quantile regression
MiFID
dark
pools
high frequency trading
C23
G28
L10
Themes
empirical