Effects of Lit and Dark Market Fragmentation on Liquidity
Résumé
Based on data from eight exchanges and a trade reporting facility for a large sample of LSE- and Euronext-listed equities, this article investigates how lit and dark market fragmentation affects liquidity on the primary exchange and across markets. Fragmentation between lit order books is found to improve liquidity, with greater benefits for large stocks and stocks with less electronic trading. When algorithmic trading (AT) is controlled for: (1) spreads decrease with both lit fragmentation and AT but the impact of fragmentation is greater; (2) lit fragmentation increases depth across markets without reducing it on the primary exchange, while AT has a negative impact on depth. Dark trading is associated with greater depth but wider quoted spreads, the combination of both effects being neutral for effective spreads.