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Fragmentation and Price Discovery: A Comparison of Reg NMS and MiFID1

Frederick H. deB. Harris, Thomas H. McInish, Frank J. Sensenbrenner and Robert A. Wood
The Journal of Trading Fall 2014, 9 (4) 6-36; DOI: https://doi.org/10.3905/jot.2014.9.4.006
Frederick H. deB. Harris
is John B. McKinnon Professor of Economics and Finance in the School of Business at Wake Forest University in Winston-Salem, NC.
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  • For correspondence: harrisf@wfu.edu
Thomas H. McInish
is Wunderlich Chair and Professor of Finance in the School of Business at University of Memphis in Memphis, TN.
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  • For correspondence: tmcinish@memphis.edu
Frank J. Sensenbrenner
is a non-resident fellow in the Johns Hopkins School of Advanced International Studies, Center for Transatlantic Relations in Washington, DC.
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  • For correspondence: frank.sensenbrenner@gmail.com
Robert A. Wood
is University Distinguished Professor Emeritus in the Institute for the Study of Security Markets in London, U.K.
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  • For correspondence: rawood@pobox.com
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Abstract

We study NYSE, NASDAQ, and ARCA prices for DJIA stocks and LSE, Xetra, and Chi-X prices for five leading British equities. MiFID1 hastened fragmentation but accomplished the intended cointegration of European equity markets that had previously been segmented. Initially, price discovery in London was largely unaffected; permanent quote innovations remained more than 90% attributable to the LSE. However, clearing and settlement fee reductions by Chi-X five months later did result in a substantial reduction in the information impounding and price discovery efficiency of London Stock Exchange trades. The contemporaneous situation in the United States with the implementation of Reg NMS was quite different. During its staggered rollout in 2007, NYSE’s price discovery declined steadily from 74% to 41%, with much of that role migrating to ARCA. In this case, the price discovery efficiency of NASDAQ substantially improved.

TOPICS: Exchanges/markets/clearinghouses, security analysis and valuation, developed

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The Journal of Trading: 9 (4)
The Journal of Trading
Vol. 9, Issue 4
Fall 2014
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Fragmentation and Price Discovery: A Comparison of Reg NMS and MiFID1
Frederick H. deB. Harris, Thomas H. McInish, Frank J. Sensenbrenner, Robert A. Wood
The Journal of Trading Sep 2014, 9 (4) 6-36; DOI: 10.3905/jot.2014.9.4.006

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Fragmentation and Price Discovery: A Comparison of Reg NMS and MiFID1
Frederick H. deB. Harris, Thomas H. McInish, Frank J. Sensenbrenner, Robert A. Wood
The Journal of Trading Sep 2014, 9 (4) 6-36; DOI: 10.3905/jot.2014.9.4.006
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  • Article
    • Abstract
    • Comparison to MiFID1
    • THE ROLE OF MULTILATERAL TRADING FACILITIES IN EUROPE POST-MIFID1
    • RELATED LITERATURE
    • MODEL SPECIFICATION4
    • PRICE DISCOVERY RESULTS OF LONDON STUDY
    • PRICE DISCOVERY IN THE DJIA STOCKS PRE/POST-REG NMS
    • SUMMARY AND CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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