The paradoxical effects of market fragmentation on adverse selection risk and market efficiency

Gbenga Ibikunle, Davide Mare, Yuxin Sun

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

Unlike the US’s Regulation National Market System (RNMS), the EU’s Markets in Financial Instruments Directive (MiFID) does not impose a formal exchange trading linkage or guarantee a best execution price. This raises concerns about consolidated market quality in increasingly fragmented European markets. We investigate the impact of visible trading fragmentation on the quality of the London equity market and find a non-linear relationship between fragmentation and adverse selection risk. At moderate levels of fragmentation, order flow competition reduces adverse selection risk and enhances market efficiency by reducing arbitrage opportunities. Contrarily, high levels of fragmentation heighten adverse selection issues.
Original languageEnglish
JournalThe European Journal of Finance
Early online date27 Mar 2020
DOIs
Publication statusE-pub ahead of print - 27 Mar 2020

Keywords / Materials (for Non-textual outputs)

  • market fragmentation
  • Markets in Financial Instruments Directive (MiFID)
  • multilateral trading facilities (MTFs)
  • adverse selection risk
  • market efficiency

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