Fragmentation and inefficiencies in US equity markets: Evidence from the Dow 30

Abstract

Using the most comprehensive source of commercially available data on the US National Market System, we analyze all quotes and trades associated with Dow 30 stocks in calendar year 2016 from the vantage point of a single and fixed frame of reference. We find that inefficiencies created in part by the fragmentation of the equity marketplace are relatively common and persist for longer than what physical constraints may suggest. Information feeds reported different prices for the same equity more than 120 million times, with almost 64 million dislocation segments featuring meaningfully longer duration and higher magnitude. During this period, roughly 22% of all trades occurred while the SIP and aggregated direct feeds were dislocated. The current market configuration resulted in a realized opportunity cost totaling over $160 million, a conservative estimate that does not take into account intra-day offsetting events. * Corresponding authors: Brian Tivnan (btivnan@mitre.org) and Christopher Danforth (chris.danforth@uvm.edu).

The complex nature of financial market microstructure: the case of a stock market crash

“…Numerous previous studies, e.g., King ( 1966 ), Cavaglia et al ( 2000 ), and Fan et al ( 2016 ), suggest the presence of an industry effect such that the prices of stocks in the same industry move together because they face the same production and demand issues. Other studies, e.g., O’Hara and Ye ( 2011 ), Menkveldt and Yueshen ( 2019 ), and Tivan et al ( 2020 ), argue that stock markets may be fragmented, i.e., there are many markets that serve the same general purpose, but, at times, they may not be well connected to each other and, thus, have the potential to create current or latent liquidity problems.…”