Short- and Long-Term Effects of Multimarket Trading

We analyze both short- and long-term effects of multimarket trading by examining the entries of multiple markets in three actively traded Exchange Traded Funds (DIA, QQQ, and SPY). Using a time series analysis, we follow the market evolution of these ETFs with regard to order flow fragmentation, trading activity, trading costs, volatility, price efficiency, and price impact. We find that large scale entries, mainly the NYSE, improve overall market quality while small scale entries have ambiguous effects. We find evidence that the competition effect dominates the fragmentation effect over a long-term horizon. Market fragmentation is associated with declines in trading costs. We also present evidence against the view that multimarket trading harms price efficiency and increases price volatility. Additionally, we find that the order handling rules help mitigate the fragmentation effect and facilitate the competition effect