Fragmented Equity Markets: Do They Pass the Test?

Tuesday, November 12, 2013 ( 2:00 pm to 3:30 pm )

Location: Babbio Center 430


With the implementation of Regulation National Market System in 2007, the number of exchanges and alternative trading venues increased rapidly in the U.S. In this paper, I examine the effects of this market fragmentation on the quality of U.S. equity markets from a price discovery perspective. Constructing three fragmentation measures (concentration ratio, herfindahl index, and off-exchange trading percentage), I test the effects of fragmentation on the intraday volatility and liquidity of NYSE and NASDAQ stocks, over an eight-year sample period of 2005-2012. The cross-sectional analyses indicate that stocks with the most fragmented trading experience lower transaction costs, but also higher intraday volatility compared to stocks with more consolidated trading. In conclusion, fragmentation has a two-sided effect on equity market quality:  while it improves liquidity, it also accentuates intraday volatility. These findings contribute to the literature on the effects of fragmentation, which has been an ongoing debate in recent years in both the U.S. and the European markets. 



Nazli Sila Alan is a Ph.D. Candidate in Finance at the Zicklin School of Business, Baruch College, The City University of New York. Her primary research area is market microstructure, with a focus on price discovery process and market volatility. Alan’s work has been published in the Journal of Portfolio Management and she has presented her research at several academic conferences. She previously worked in a commercial bank in Istanbul. Alan completed a BA in Business Administration at Bogazici University, Istanbul, and an MS in Finance at the Frank G. Zarb School of Business, Hofstra University.


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