Public information in fragmented markets
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This paper studies the impact of public information on trading and market fragmentation in FTSE 100 stocks on the LSE and on Chi-X, the largest multilateral trading facility in Europe. We proxy daily public information through newswire messages, which we differentiate by their ex-ante sentiment. Traders spend a considerable amount of money on subscriptions to newswires and these newswires are the source of much of the real-time public information they receive. We find that overall liquidity decreases as a result of daily negative public information and that it does not change on positive days. Generally, there is a strong increase in trading activity on days with public information. On both positive and negative days, private information shifts from Chi-X to the LSE. Informed trading resorts to the LSE when there are high levels of public information. The shift to the LSE is driven by a decrease of private information on Chi-X on positive days and by an increase in private information on the LSE on negative days. Altogether, we find asymmetric reactions to public information and public information effects on market fragmentation. Our study confirms the important role that public information plays in finding the efficient price in equity markets.
KeywordsPublic information Firm-specific news Market quality Market fragmentation MiFID Multilateral trading facilities
JEL ClassificationG10 G14 G15 G18
We thank Ryan Riordan, Florian Teschner, Sarah Zhang, participants at the XVIII Spanish Finance Forum, the Campus for Finance Research Conference 2011, the Conference of the Swiss Society for Financial Market Research (SGF) 2011, and an anonymous referee for very valuable comments and suggestions. Financial support from Boerse Stuttgart and Deutsche Forschungsgemeinschaft (German Research Foundation) is gratefully acknowledged.
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