Adverse selection, market access, and inter-market competition

Peter Hoffmann

Journal of Banking & Finance, 2016, vol. 65, issue C, 108-119

Abstract: This paper investigates the role of informed trading in a fragmented financial market under the absence of inter-market price priority. Due to frictions in traders’ market access, liquidity providers on alternative trading platforms can be exposed to an increased adverse selection risk. As a consequence, the main market will dominate (display better quotes) frequently albeit charging considerably higher transaction fees. The empirical analysis of a dataset of trading in French and German stocks suggests that trades on Chi-X Europe, a low-cost trading platform, carry significantly more private information than those executed in the Primary Markets. Consistent with our theory, we find a negative relationship between the competitiveness of Chi-X Europe’s quotes and this excess adverse selection risk faced by liquidity providers in the cross-section.

Keywords: MiFID; Inter-market competition; Adverse selection; Transaction fees (search for similar items in EconPapers)
JEL-codes: G10 G14 G24 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:65:y:2016:i:c:p:108-119

DOI: 10.1016/j.jbankfin.2015.10.009

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