Competition Between Equity Markets: A Review of the Consolidation Versus Fragmentation Debate
In: Journal of Economic Surveys, Vol. 31, No. 3, pp. 792-814
Category: Publications in scientific journals [Find it]
Technological advances and regulatory initiatives have led to the emergence of a competitive, but fragmented, equity trading landscape in several markets around the world. While these changes have coincided with benefits like reduced transaction costs, advancements in trading technology, and access to a diverse array of execution venues, regulators and market participants have also raised concerns about the welfare implications of innovations like dark pools as well as the resulting increase in execution complexity. Exchanges are often viewed as natural monopolies due to the presence of network externalities and economies of scale. However, heterogeneity in traders' preferences means that no single venue can serve the interests of all investors. Fragmentation of the marketplace can be seen as a direct outcome of this heterogeneity. In this paper, we review the theoretical and empirical literature examining the economic arguments and motivations underlying market fragmentation, the resulting implications for liquidity and price efficiency, and the role for public policy. Beyond the concerns for equity markets, the lessons from this literature are relevant for other asset classes experiencing an increase in competition between trading venues.
Reference No.: 2017-77
The State of Play in European Over-the-Counter Equities Trading
In: Journal of Trading, Vol. 10, No. 2, pp. 23-32
Category: Publications in journals [Find it]
In early 2014, the European Council, the European Parliament, and the European Commission reached an agreement on MiFID II (Markets in Financial Instruments Directive) and on MiFIR (Markets in Financial Instruments Regulation). Because the new regulatory framework will significantly influence and likely reduce European over-the-counter (OTC) equities trading, our article investigates the current state of OTC trading in Europe. Therefore, we investigate OTC transaction sizes for Euro STOXX 50 constituents between January 2008 and June 2013, discuss whether and how they might have caused market impact, and give insights on how this affects the European trading landscape.
Reference No.: 2015-41
Spoilt for Choice: Order Routing Decisions in Fragmented Equity Markets
In: Working Paper; presented at DGF 2018; Trier, Germany, SGF 2015; Zurich, Switzerland, IFABS 2015; Hangzhou, China, AsianFA2015; Changsha, China, FMA 2015; Orlando, Florida, USA, SFA 2015; Captiva Island, Florida, USA and FMA Europe 2015; Venice, Italy
Category: Working papers [Find it]
The equity trading landscape all over the world has changed dramatically in recent years. We have witnessed the advent of new trading venues and significant changes in the market shares of existing ones. We use an extensive panel dataset from the European equity markets to analyze the market shares of five categories of lit and dark trading mechanisms. Market design features, such as minimum tick size, immediacy and anonymity; market conditions, such as liquidity and volatility; and the informational environment have distinct implications for order routing decisions and trading venues' resulting market shares. Furthermore, these implications differ distinctly for small and large trades, probably because traders jointly optimize their trade size and venue choice. Our results both confirm and go beyond current theoretical predictions on trading in fragmented markets.
Reference No.: 2015-17