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The impact of fragmentation, exchange fees and liquidity provision on market quality

Michael Aitken, Haoming Chen and Sean Foley

Journal of Empirical Finance, 2017, vol. 41, issue C, 140-160

Abstract: We analyse the impact of two major financial frictions on market quality in a high-frequency environment: market fragmentation and exchange fees. We find fragmentation significantly improves market quality, with benefits increasing with greater fragmentation. Fragmentation significantly reduces spreads for stocks that are least constrained by the minimum tick size, whilst constrained stocks experience significant increases in depth. Using high-frequency data we document cross-market liquidity dynamics, demonstrating that entrant markets need to trade (not only quote) in order to improve liquidity, and that endogenous liquidity suppliers increase their usage of the alternate market when queues on the incumbent exchange are long and quoted spreads are constrained by the minimum tick size, consistent with queue-jumping order duplication.

Keywords: Competition; Fragmentation; Queue jumping; Trading fees (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:41:y:2017:i:c:p:140-160

DOI: 10.1016/j.jempfin.2016.10.002

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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