Abstract
This book chapter provides an overview of market fragmentation in Europe since the first implementation of the Markets in Financial Instruments Directive (MiFID) on 1 November 2007. It makes a brief literature review on the consequences of lit and dark fragmentation for liquidity. It presents an empirical analysis of the effect of market fragmentation on price quality measured by price inefficiency coefficients (PICs) based on variance ratios for a sample of European large and medium capitalizations stocks. Contrary to the results by O’Hara and Ye (Journal of Financial Economics 100(3):459–474, 2011) for U.S. stocks, I do not find a clearly significant impact of market fragmentation on price quality. The only PICs to be affected are those based on 1-s to 5-s return variance ratios. According to 1-s to 5-s PICs: (1) the price quality of large UK equities improved with market fragmentation after MiFID; (2) the price quality of large Euronext equities improved with fragmentation in the primary market but deteriorated when measured across markets; and (3) the price quality of Euronext mid-caps was adversely affected. Notwithstanding these findings, price quality is not affected when measured at any other horizon.
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Notes
- 1.
MiFID1 refers to the first version of the directive implemented on 1 November 2007 as opposed to the upcoming revision (MiFID2).
- 2.
A provision in the 1993 Investment Services Directive (ISD) permitted (but did not mandate) individual member states to require orders from investors in that member state to be executed only in regulated markets. This provision was applied in France, Italy, and Spain.
- 3.
The DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange of Deutsche Börse. The AEX index is a stock market index composed of a maximum of 25 of the most actively traded stocks listed on Euronext Amsterdam.
- 4.
The FTSE 100 index is a stock index composed of the stocks of the 100 companies listed on the London Stock Exchange having the highest market capitalization. The CAC 40 index is the flagship French stock market index. It comprises the stocks of the forty largest companies listed on Euronext Paris.
- 5.
Getco Execution Services, which exclusively accept orders from broker-dealers, enters this category.
- 6.
No more than 13 investment banks are declared as SIs (cf. http://www.mifiddatabase.esma.europa.eu/). This number has remained nearly unchanged since the implementation of MiFID1 and trades reported by SIs never reached significant volumes.
- 7.
- 8.
For example, in 2009, NYSE-Euronext launched dark pool SmartPool and MTF NYSE Arca Europe.
- 9.
For that reason, they are sometimes designated in the press as the “Next 80”.
- 10.
Nasdaq OMX Europe closed on 21 May 2010.
- 11.
For more details about how those data were reprocessed, refer to Gresse (2013).
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Acknowledgement
C. Gresse addresses special thanks to IFS (Intelligent Financial Systems) and their managing directors, Sabine and Darren Toulson, for generously providing the data used in Sect. 4. I am particularly grateful to Mark Holloway, Oliver Speakman, and Sugandha Sharma of IFS for their technical work on the data. I also wish to thank all the people who contributed to improving this review either by their comments or interviews as, among others, Simon Brickles, Peter Clifford, Romain Devai, Luca Filippa, Laurent Fournier, Lorenzo Gallai, Laurent Grillet-Aubert, Alasdair Haynes, Thomas Krantz, Fabrice Pansard, and Peter Randall, as well as participants in the Foresight project on Computer-Based Trading. This chapter is partly inspired from the work C. Gresse conducted for this project.
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Gresse, C. (2014). Market Fragmentation and Market Quality: The European Experience. In: Dufrénot, G., Jawadi, F., Louhichi, W. (eds) Market Microstructure and Nonlinear Dynamics. Springer, Cham. https://doi.org/10.1007/978-3-319-05212-0_1
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