The fragmentation of financial markets: theoretical reflections and empirical evidence on French stocks.

Summary With the multiple listing of many financial securities on several exchanges, but also with the coexistence of several trading systems within the same exchange, we observe a fragmentation of order flows on the markets. With fragmentation, two types of competition are juxtaposed: competition between investors seeking to trade at the best prices, and competition between markets, each seeking to attract the largest number of investors possible. By considering two performance criteria, liquidity and informational efficiency, this thesis seeks to determine whether fragmentation and competition between markets contribute to economic efficiency, and whether one trading organization is more efficient than another. The research suggests that if an order-driven market is competing with market makers in an asymmetric information environment, the detour of some orders to these market makers does not undermine market efficiency. Fragmentation harms the liquidity of the auction market as well as the general liquidity of the traded security, by increasing the anti-selection costs. This result should be modulated according to the ability of uninformed agents to be recognized as such by the dealers. Finally, the result according to which the listing of a security on a new market deteriorates its liquidity is not necessarily verified if it drains a new demand for liquidity on the security. Through field observations and empirical comparisons of French stocks traded in Paris and London, the relative liquidity of the three competing trading structures, the fixing, the continuous auction and the counterparty, is assessed. Contrary to previous studies on the subject, it is shown that the Paris market, driven by orders, is dominant, not only in the execution of transaction volumes, but also in the price discovery process. According to the tests and observations made, the dual listing of French stocks is not exactly a case of fragmentation but rather a case of segmentation of the exchanges.