The Impact of Market Fragmentation on European Stock Exchanges

MiFID has fostered competition between stock exchanges and alternative trading systems by removing the possibility for EU Member States to establish that equities must be traded only on regulated markets (so-called concentration rule). This paper empirically measures how market fragmentation is affecting the quality of blue chip’s trading on European regulated markets. Our study evaluates the impact of fragmentation on liquidity, on information efficiency and on the price discovery process. We test the robustness of our results by applying a variety of empirical approaches. Our main findings are that fragmentation increases liquidity, but it reduces market efficiency. Moreover, primary exchanges tend to lose their leading role in the price discovery process of fragmented stocks. We show that our results are in line with some regulatory concerns which are leading to the review of MiFID.