The impact of fragmentation, exchange fees and liquidity provision on market quality

Michael Aitken, Haoming Chen, Sean Foley*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)

Abstract

We analyse the impact of two major financial frictions on market quality in a high-frequency environment: market fragmentation and exchange fees. We find fragmentation significantly improves market quality, with benefits increasing with greater fragmentation. Fragmentation significantly reduces spreads for stocks that are least constrained by the minimum tick size, whilst constrained stocks experience significant increases in depth. Using high-frequency data we document cross-market liquidity dynamics, demonstrating that entrant markets need to trade (not only quote) in order to improve liquidity, and that endogenous liquidity suppliers increase their usage of the alternate market when queues on the incumbent exchange are long and quoted spreads are constrained by the minimum tick size, consistent with queue-jumping order duplication.

Original languageEnglish
Pages (from-to)140-160
Number of pages21
JournalJournal of Empirical Finance
Volume41
DOIs
Publication statusPublished - Mar 2017

Keywords

  • Competition
  • Fragmentation
  • Queue jumping
  • Trading fees

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