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The Demise of the NYSE and Nasdaq: Market Quality in the Age of Market Fragmentation

Published online by Cambridge University Press:  04 January 2023

Peter Haslag  and
Matthew C. Ringgenberg Open the ORCID record for Matthew C. Ringgenberg [Opens in a new window]
Peter Haslag
Affiliation:
Vanderbilt University Owen Graduate School of Management peter.haslag@vanderbilt.edu
Matthew C. Ringgenberg*
Affiliation:
University of Utah David Eccles School of Business
*
matthew.ringgenberg@eccles.utah.edu (corresponding author)
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Abstract

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U.S. equity exchanges have experienced a dramatic increase in competition from new entrants, resulting in the fragmentation of trading across venues. While market quality has generally improved over this period, we show most of the improvements have accrued to the largest stocks. We then show this bifurcation in market quality is related to the fragmentation of trading. Theoretically, more exchange competition should reduce trading costs, yet it may also increase adverse selection for liquidity providers, leading to higher spreads. We document evidence of both effects (fragmentation improves market quality for large stocks while small stocks experience relatively worse quality).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 7 , November 2023 , pp. 2753 - 2782
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

This article was previously circulated under the title, “The Causal Impact of Market Fragmentation on Liquidity.” We are grateful for the helpful comments of an anonymous hedge fund trader, HendrikBessembinder (the editor), Jonathan Brogaard, Radha Gopalan, Mat Gulley, Pankaj Jain, Ohad Kadan, Jimmie Lenz, Albert Menkveld, Thomas McInish, Maureen O’Hara, Emiliano Pagnotta, Guillaume Roger, Gideon Saar, Chester Spatt, James Upson, Jos Van Bommel, Kumar Venkataraman (the referee), Mao Ye, participants at the 2015 European Winter Finance Summit, the 2016 American Finance Association Annual Meeting, the 2016 FIRN-UTS Market Microstructure Meeting, the 2017 Fourth Annual Conference on Financial Market Regulation, the 2017 NBER Conference on Competition and the Industrial Organization of Securities Markets, and seminar participants at the University of Memphis, Saint Louis University, and Washington University in St. Louis. All errors are our own.

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