HFT Provides Liquidity in Fragmented and Non-Fragmented Markets

The Issue:

SEC Chairman Mary Jo White pointed out a “market structure concern is fragmentation. Order flow in exchange-listed equities is divided among many trading venues — 11 exchanges, more than 40 alternative trading systems, and more than 250 broker-dealers.” Ms. White said the Commission will “be considering whether the SEC’s own rules, such as the trade-through rule of Regulation NMS, have contributed to excessive fragmentation across all types of venues.”

MMI’s Stance:

Another widespread misconception is that high frequency trading firms (HFTs) or Principal Trading Firms (PTFs) rely on the opportunities presented by having several venues in which to trade. MMI advocates fewer venues and points out that its Members trade successfully in many markets and countries where there is only one exchange.

The Causal Impact of Market Fragmentation on Liquidity

The Causal Impact of Market Fragmentation on Liquidity
Professors Peter H. Haslag and Matthew Ringgenberg of Washington University – Olin Business School find “fragmentation has a differential impact on large and small stocks. For large stocks, the former effect dominates and market quality, as measured by bid-ask spreads and price efficiency, is generally better. For small stocks, we find that negative network externalities dominate and liquidity and price efficiency are worse.”

Is Market Fragmentation Harming Market Quality?

Is Market Fragmentation Harming Market Quality?
Professors Maureen O’Hara and Mao Ye of Cornell University find that “market fragmentation generally reduces transactions costs and increases execution speeds. Fragmentation does increase short-term volatility, but prices are more efficient in that they are closer to being a random walk. Our results that fragmentation does not appear to harm market quality have important implications for regulatory policy.”