White Paper No. 25, 2010

Competition Among Electronic Markets and Market Quality

With the Markets in Financial Instruments Directive (MiFID) in effect, new electronic markets emerged in European equities trading. We address the impact of market fragmentation on stock liquidity by examining samples of stocks before and after the introduction of MiFID. Panel regressions indicate a contrary development of liquidity for stocks with high competition among trading venues and stocks with a low level of competition. For the former, we find a significant positive liquidity effect between observation periods in the home market and a virtual order book consolidating multiple markets, while this could not be observed for stocks with low competition.