The impact of multilateral trading facilities on price discovery

Abstract

Our study aims to examine whether market segmentation and competition manifested in the proliferation of multilateral trading facilities (MTFs) improve market quality after the implementation of MiFID. To do this, we employ the Common Factor Weight and Weighted Price Contribution methods to study relative price discovery for three major MTFs—LSE, BATS, and Turquoise, using intra-day, five-minute transaction prices. The results suggest that the two trading venues, BATS and Turquoise, contribute more to impounding fundamental information, implying a shift in price dominance from traditional LSE to MTFs. In addition, the intra-day price contributions of MTFs are higher than those of LSE, especially during the first and last periods of the day. The estimated average daily price contributions are consistent with this result.