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Short‐ and Long‐Term Effects of Multimarket Trading
Author(s) -
Nguyen Vanthuan,
Van Ness Bonnie F.,
Van Ness Robert A.
Publication year - 2007
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2007.00175.x
Subject(s) - volatility (finance) , fragmentation (computing) , economics , competition (biology) , monetary economics , microeconomics , business , industrial organization , econometrics , computer science , ecology , biology , operating system
We analyze short‐ and long‐term effects of multimarket trading by examining the entries of multiple markets into transacting three ETFs, DIA, QQQ, and SPY. We find that large‐scale entries improve overall market quality, while small‐scale entries have ambiguous effects. Our results show that the competition effect dominates the fragmentation effect over a long horizon and that market fragmentation leads to a decline in trading costs. Further, we find that the order handling rules help mitigate the fragmentation effect and facilitate the competition effect. We do not find that multimarket trading harms price efficiency or increases price volatility.