Short- and Long-Term Effects of Multimarket Trading

Financial Review 01/2007; 42(3):349-372. DOI: 10.1111/j.1540-6288.2007.00175.x
Source: RePEc

ABSTRACT We analyze short- and long-term effects of multimarket trading by examining the entries of multiple markets into transacting three ETFs, DIA, QQQ, and SPY. We find that large-scale entries improve overall market quality, while small-scale entries have ambiguous effects. Our results show that the competition effect dominates the fragmentation effect over a long horizon and that market fragmentation leads to a decline in trading costs. Further, we find that the order handling rules help mitigate the fragmentation effect and facilitate the competition effect. We do not find that multimarket trading harms price efficiency or increases price volatility. Copyright 2007, The Eastern Finance Association.

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    ABSTRACT: Consider a stock which is simultaneously traded on two or more venues, either because its company is cross-listed or because regulation allows multi-trading. We set the idea that these venues are 'indirectly' connected and represent a network. If the 'importance' of a venue is traditionally measured by its isolated-centrality (e.g. trading volumes observed inside it), we introduce a network measure, the degree-centrality, which includes trading activity due to its connections with other stock markets. Using trading volume data of nearly 22,000 equities we study the dynamic of market centrality among the various European trading venues between 2005 and 2009. European Regulated Stock Exchanges (SEs) and Alternative Trading Venues (ATVs), introduced in Europe in 2007, are the nodes/vertexes of our network. We observe that the birth of European ATVs (Multi-lateral Trading Facilities, Systematic Internalisers and the OTC market) eroded the isolated-centrality of certain European SEs (particularly London), but not for all. In contrast, degree-centrality significantly increased for the majority of the 48 SEs analyzed, in favor of multi-markets coexistence. Moreover, European ATVs did not act as substitute to the secondary market for cross-listed shares. Paradoxically, our results show that for medium size European SEs, cross-listing trading activity Granger-causes multi-trading on European ATVs.
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    ABSTRACT: Based on trade and quote data from eight exchanges and a trade reporting facility for a sample of LSE- and Euronext-listed equities, this article compares the consolidated liquidity of competing markets, also called global liquidity, as well as the local liquidity of primary exchanges, before and after MiFID. It then investigates how liquidity measured by spreads and best-quote depth relate to market fragmentation and internalization after MiFID. Market fragmentation is found to improve global and local liquidity, with spreads decreasing proportionally to market competition. The decline in depth observed in the early post-MiFID period is driven by other factors than market fragmentation. The only harmful effect is that fragmentation may reduce market depth for small stocks. Further, internalization is not found to be detrimental to liquidity.
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    ABSTRACT: This empirical study based on data from several exchanges and trading platforms for a sample of 153 European blue chip stocks over a post-MiFID three-month period shows that the way liquidity correlates with fragmentation is diverse and depends on the market, the type of liquidity metrics, and the type of fragmentation that is considered. All in all, fragmentation seems to be more beneficial to global traders trading in several market places than to local traders trading on the primary exchange only, which confirms the crucial role of order routing systems in fragmented markets. Further, fragmentation adversely affects price quality by increasing short-term volatility. That adverse effect is assignable to market-traded order flow fragmentation but not to internalization. oui

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