Why Do Different Stocks Fragment Differently?

One of the biggest successes of the Markets in Financial Instruments Directive (MiFID) has been the emergence of a truly competitive trading landscape in the European equities market. However, this fragmentation has not been uniform across the entire European stock universe. There are differences across different European indices as well as across stocks within a single index. In the first study, we examine the cross-sectional and time-series determinants of differences in the levels of fragmentation. Determinants considered include stock characteristics, venues’ trading protocols, and possible cherry-picking by trading venues concerning the stocks admitted for trading.

Regulatory changes in the US and EU have brought forth a wealth of research on the trade-off between innovation and cost reduction arising from the existence of competition, and potentially detrimental effects on liquidity due to network externalities. We examine the isolated effects of competition and fragmentation by studying changes in liquidity and price efficiency around specific changes in market structure (technological integration following the merger and change in fee levels) after two venues merge.