Fragmentation, Competition and Market Quality: A Post-Mifid Analysis

Abstract

In this paper we study competition between the London Stock Exchange (LSE) and multilateral trading facilities (MTFs) under the Markets in Financial Instruments Directive (MiFID) in FTSE 100 constituents. We find that despite the lack of price protection investors often execute at the best available price. This indicates that price competition is important for investors and that most investors are monitoring multiple markets. In cases where participants do not execute at the best price, we find that liquidity is in general higher and that trades are more informative. When comparing the market quality across trading venues we find remarkable differences. The LSE posts better terms of trade than any MTF. However, implicit trading costs are smaller on MTFs. Our results show that Chi-X, an MTF, contributes more to quote-based information discovery than the LSE but that trades on the LSE carry more private information than on MTFs. This is consistent with the theory, presented in Chowdhry and Nanda (1991), that more informed investors gravitate to the market that is already the largest and confirms some concerns regarding 'cream-skimming'. Finally, we find despite a high level of market fragmentation that the market for FTSE 100 constituents is relatively efficient.