Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153952
Authors: 
Hoffmann, Peter
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper 1519
Abstract: 
We study the role of informed trading in a fragmented financial market under the absence of inter-market price priority. Due to frictions in traders’ market access, liquidity providers on alternative trading platforms may be exposed to an increased adverse selection risk. As a consequence, the main market dominates (offers better quotes) frequently albeit charging higher transaction fees. The empirical analysis of a dataset of trading in French and German stocks suggests that trades on Chi-X, a lowcost trading platform, carry significantly more private information than those executed in the Primary Markets. Consistent with our theory, we find a negative relationship between the competitiveness of Chi-X’s quotes and this excess adverse selection risk faced by liquidity providers in the cross-section. Our results have some implications for the design of best-execution policies.
Subjects: 
adverse selection
Inter-market competition
MiFID
Transaction fees
JEL: 
G10
G14
G24
Document Type: 
Working Paper

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