Market structure, fragmentation, and market quality

Bennett, Paul B.; Li, Wei

doi:10.1016/j.finmar.2005.12.001

Cited by 141 publications

(66 citation statements)

References 53 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Huang and Stoll (1996) and Bessembinder and Kaufman (1997) compare trading costs on the NYSE and Nasdaq in a regression framework. Boehmer (2005) uses recent Rule 11ac1-5 data to compare the two trading venues, while Barclay (1997), Jones and Lipson (1999), and Bennett and Wei (2006) examine the trading costs of firms that switch from Nasdaq to the NYSE. These studies generally find higher trading costs on Nasdaq than on the NYSE.…”

Section: Related Literaturementioning

confidence: 99%

Order Consolidation, Price Efficiency, and Extreme Liquidity Shocks

Barclay

Hendershott

Jones

2008

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

We show that the consolidation of orders is important for producing efficient prices, especially during times of high liquidity demand. The NYSE's centralized opening call market performs better than Nasdaq's decentralized opening process on typical trading days. The NYSE is much better than Nasdaq on witching days when index arbitrage activity subjects S&P 500 stocks to large, predictable, and mostly informationless order flow around quarterly futures contract expirations. Nasdaq opening price efficiency improves to NYSE levels once Nasdaq initiates a consolidated opening call in November 2004, but prices on the decentralized Nasdaq remain less efficient at other times of day.

show abstract

Section: Related Literaturementioning

confidence: 99%

Order Consolidation, Price Efficiency, and Extreme Liquidity Shocks

Barclay

Hendershott

Jones

2008

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

show abstract

“…O'Hara and Ye (2011) use historical quote data and execution metrics to demonstrate that market fragmentation does not appear to harm measures such as spreads, execution speed, and efficiency. Bennett and Wei (2006) compare the execution costs of stocks that have switched from Nasdaq to the more consolidated NYSE, finding evidence that execution costs decline with order flow consolidation. Amihud et al (2003) examine the response of equities on the Tel Aviv Stock Exchange to the exercise of corporate warrants, concluding that consolidation improves liquidity.…”

Section: Modeling Market Structure and Clearing Rulesmentioning

confidence: 99%

Latency arbitrage in fragmented markets: A strategic agent-based analysis

Wah¹,

Wellman

2017

View full text Add to dashboard Cite

Abstract.We study the effect of latency arbitrage on allocative efficiency and liquidity in fragmented financial markets. We employ a simple model of latency arbitrage in which a single security is traded on two exchanges, with price quotes available to regular traders only after some delay. An infinitely fast arbitrageur reaps profits when the two markets diverge due to this latency in cross-market communication. Using an agent-based approach, we simulate interactions between high-frequency and zero-intelligence trading agents. From simulation data over a large space of strategy combinations, we estimate game models and compute strategic equilibria in a variety of market environments. We then evaluate allocative efficiency and market liquidity in equilibrium, and we find that market fragmentation and the presence of a latency arbitrageur reduces total surplus and negatively impacts liquidity. By replacing continuous-time markets with periodic call markets, we eliminate latency arbitrage opportunities and achieve further efficiency gains through the aggregation of orders over short time periods.

show abstract

“…Degryse (2009) confirms this result with his dynamic market model using the example of a dealer market and a crossing network. There are also several empirical studies showing that market fragmentation increases liquidity (e.g., Battalio, 1997;Boehmer and Boehmer, 2003;Foucault and Menkveld, 2008;Hengelbrock and Theissen, 2009) and decreases transaction costs (e.g., Bennett and Wei, 2006;O'Hara and Ye, 2011).…”

Section: Market Fragmentationmentioning

confidence: 99%

Coordination of Circuit Breakers? Volume Migration and Volatility Spillover in Fragmented Markets

2017

View full text Add to dashboard Cite

The introduction of the Markets in Financial Instruments Directive (MiFID I) in November 2007 fostered the competition between incumbent exchanges and emerging alternative venues. This increased competition resulted in a fragmented market landscape, which benefits market participants due to decreasing explicit transaction costs. However, market fragmentation is also associated with drawbacks for regulators and market participants since liquidity and price discovery are split across different trading venues.One particular issue in fragmented markets are safeguards such as circuit breakers, which aim to prevent extreme price jumps and excessive volatility. If a stock is traded on multiple venues, these circuit breakers might forfeit their effectiveness to manage excess volatility when they are not coordinated among different venues.Therefore, we provide new empirical insights concerning the discussion of circuit breaker coordination and analyze volume migration, shifts in market shares, and volatility spillovers during volatility interruptions in European securities markets. A volatility interruption is a specific type of circuit breaker that interrupts continuous trading with an unscheduled call auction. We observe that during volatility interruptions on the main market, turnover on the alternative venues almost dries out although there is no active circuit breaker on the alternative venues. Moreover, the market share of the main market increases sharply during the auction of the volatility interruption. Thus, the main market is therefore of major importance during turbulent times. By analyzing factors influencing the shift of market shares during volatility interruptions on the main market, we are able to trace back the increasing importance of the main market during these times to two different phenomena: the level of market fragmentation and the level of HFT activity.On the one hand, our results reveal that if a circuit breaker is triggered, traders either refrain from trading on the alternative venues or, if they trade, they prefer to participate in the call auction on the main market. On the other hand, we highlight that multi-market market making and arbitrage trading strategies of high-frequency traders get constrained and become more risky in the absence of the main market because an important price signal is missing and rebalancing their inventories gets too expensive.Consequently, our results provide empirical support against the hypothesis and often claimed concern that volume migrates from the main market to alternative venues during a circuit breaker on the main market. A coordination of circuit breakers among venues does not seem to be necessary because markets are implicitly coordinated due to traders' behavior. January 27, 2017 Coordination of Circuit AbstractWe study circuit breakers in a fragmented, multi-market environment and investigate whether a coordination of circuit breakers is necessary to ensure their effectiveness. In doing so, we analyze 2,337 volatility interruptions on Deutsche Boer...

show abstract

Market structure, fragmentation, and market quality

Cited by 141 publications

References 53 publications

Order Consolidation, Price Efficiency, and Extreme Liquidity Shocks

Order Consolidation, Price Efficiency, and Extreme Liquidity Shocks

Latency arbitrage in fragmented markets: A strategic agent-based analysis

Coordination of Circuit Breakers? Volume Migration and Volatility Spillover in Fragmented Markets

Contact Info

Product

Resources

About