The Role of Traditional Exchanges in Fragmented Markets

Abstract

The Markets in Financial Instruments Directive (MiFID) considerably changed the nature of European equity markets. Introduced in November 2007, it allowed alternative trading venues to compete for order flow with traditional exchanges. This paper studies the impact of increased fragmentation of order flow on market quality in UK blue chip stocks from two different dimensions. First, we provide evidence that market quality increases along with the level of market fragmentation over 2009. Second, we evaluate intraday patterns of trading intensity and market quality measures. Our results show that the traditional exchange has an important function at market opening and closing, attracting a significantly higher share of trading volume compared to other periods of the trading day. Additionally, we find converging intraday patterns across trading venues over time which indicates a maturing market.