The effect of fragmentation in trading on market quality in the UK equity market

Lena Boneva, Oliver Linton and Michael Vogt
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Michael Vogt: Institute for Fiscal Studies

No CWP42/13, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: We investigate the effects of fragmentation in equity trading on the quality of the trading outcomes, specifically volatility, liquidity and volume. We use panel regression methods on a weekly dataset following the FTSE350 stocks over the period 2008-2011, which provides a lot of cross-sectional and time series variation in fragmentation. 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 a version of the common correlated effects estimator (Pesaran, 2006). One finding is that volatility is lower in a fragmented market when compared to a monopoly. Trading volume at the London Stock Exchange is lower too, but global trading volume is higher if order flow is fragmented across multiple venues. When separating overall fragmentation into visible fragmentation and dark reading, we find that the decline in LSE volume can be attributed to visible fragmentation, while the increase in global volume is due to dark trading.

Keywords: Heterogeneous panel data; quantile regression; MiFID (search for similar items in EconPapers)
JEL-codes: C23 G28 L10 (search for similar items in EconPapers)
Date: 2013-08-27
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The Effect of Fragmentation in Trading on Market Quality in the UK Equity Market (2016)
Working Paper: The Effect of Fragmentation in Trading on Market Quality in the UK Equity Market (2014)
Working Paper: The effect of fragmentation in trading on market quality in the UK equity market (2013)
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