Stock markets fragmentation, volatility and final investors

Cécile Bastidon ()

Annals of Finance, 2017, vol. 13, issue 4, No 3, 435-451

Abstract: Abstract The 2000s in equity markets are marked by two major regulatory shocks: RegNMS in the United States, and MiFID in the European Union. Simultaneously, there is a massive increase in the proportion of high-frequency trading, and market orders volume. However, trading volumes do not significantly increase. We propose a theoretical model describing the effects of stock markets fragmentation on two types of investors optimization problems: “intermediary” high-frequency and “final” investors. Volatility has a permanent and a transitory component, whose weights depend on market fragmentation via the share of non-marketable orders of intermediary investors. The trading volume of final investors depends on market fragmentation both directly via transaction costs, and indirectly via total volatility. Finally a shock in fragmentation may lead to a decrease in trading volume, enhanced in the case of an equity markets crisis by a rise in the components of volatility.

Keywords: Stock markets fragmentation; Final investors; Intermediary investors; Implicit transaction costs; Volatility (search for similar items in EconPapers)
JEL-codes: E44 G18 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10436-017-0305-0

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