Kheira BENHAMI and Christophe BISIÈRE¶
On December 2002, The Nasdaq Stock Market completed the roll out of its new trading platform SuperMontage. It was initially conceived to centralize the order flow for Nasdaq stocks. However, Island, one of the biggest ECN, decided not to participate to the montage and stopped to be “hard-linked” to Nasdaq systems. To what extent this increase in order flow fragmentation affected market functioning? Are orders executed at the best available prices on the market? We find no evidence that market quality worsened following this exit. Effective and realized spreads remained unchanged. This suggests that information dissemination and third-parties smart routing services has been sufficient to counterbalance the lack of built-in linkages. Additionally, we observed a persistent frequency of trade-through of around 15%, testifying of a non-negligible proportion of orders executed at a price worse than the best available one. However, using simulations, we showed that even when Island quote is better than the actual transaction price, an investor trading in Nasdaq would have generally experienced losses if the order were rerouted to Island. This suggests that trade-through regulation should consider depth as a major dimension.
Published by repec.org
on 7/1/2005Does Order Flow Fragmentation Impact Market Quality? The Case of Nasdaq SuperMontage