Effects of Market Fragmentation on Resiliency

This study analyses the impact of market fragmentation on resiliency, defined as the speed of recovery of the market, in normal conditions and in times of stress. I find that fragmentation has an overall positive effect on resiliency. Fragmentation increases the average ability of the market to converge towards its long-run liquidity levels by shortening the duration of liquidity deviations. In times of stress, fragmentation also speeds up the replenishment of the limit order book and its ability to recover from the moments of stress. After the Flash Crash of 2010 and recent episodes of liquidity dry-ups, fragmentation has become a source of concern. Given the rising tendency of markets to fragment, understanding the impact of fragmentation on resiliency is important for regulators and market participants