Trade fragmentation and its impact on pre-trade liquidity

Abstract: The MiFID was introduced in November 2007 to enhance market quality and consumer protection. One dimension of the directive was the abolishment of the former concentration rule, which allowed for the emergence of competition between stock exchanges. As a result, trade flow has fragmented over several trading venues. It is not clear whether fragmentation is beneficial for liquidity. On one hand, exchanges compete for order flow, which reduces liquidity costs. On the other hand, investors might experience difficulties in adjusting their trading behavior to the multimarket environment which increases liquidity costs. In this thesis we describe the current debate and its background. We contribute to the review of MiFID by studying the effects of fragmentation on the constituent stocks of the OMXS30 from November 2010 to April 2011. Our results indicate that fragmentation is beneficial but with a declining marginal effect. We also find that order flows are routed to the venues with the best quotes to a higher extent today than one year ago.