Trading rules, competition for order flow and market fragmentation

Amy Kwan, Ronald Masulis and Thomas McInish ()

Journal of Financial Economics, 2015, vol. 115, issue 2, 330-348

Abstract: We investigate competition between traditional stock exchanges and new dark trading venues using an important difference in regulatory treatment. Securities and Exchange Commission required minimum pricing increments constrain some stock spreads, causing large limit order queues. Dark pools allow some traders to bypass existing limit order queues with minimal price improvement. Using a regression discontinuity design, we find that spread constraints significantly weaken exchanges׳ competitiveness. As more orders migrate to dark pools, the probability of subsequent order execution there increases, raising liquidity. The ability to circumvent time priority of displayed limit orders is one cause of the rapid rise in US equity market fragmentation.

Keywords: Market fragmentation; Regression discontinuity; Dark pools; Trade reporting facility (search for similar items in EconPapers)
JEL-codes: G12 G24 G28 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (59)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:115:y:2015:i:2:p:330-348

DOI: 10.1016/j.jfineco.2014.09.010

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