Does stock exchange consolidation improve market liquidity? A study of stock exchange acquisition in Russia

• Exchange consolidation is an example of financial sector consolidation and is a response to ever stiffening competition among organized trading venues and electronic communication networks.
• Exchange consolidation in Russia guided by state rather than by market forces did not have unambiguously favorable implications for liquidity.
• For the market-wide sample there was no inflow of liquidity within a 1-year period.
• For the large caps sample there was an inflow of liquidity; that is evidence that local and foreign investors, despite articulated doubts of trading on the state-controlled exchange, eventually accepted the consolidated exchange as the main trading venue in Russia.

The last couple of decades have witnessed significant institutional and structural changes in financial sector within a worldwide trend toward consolidation. In the segment of organized trading stock exchanges merge and develop into large and diversified publicly traded companies. These processes are rather complicated in case of a transition economy like Russia. In December 2011 MICEX, the first largest and state-controlled stock exchange acquired RTS, the second largest and privately owned stock exchange primarily designed for foreign investors. We empirically investigate whether the acquisition resulted in improved liquidity of the Russian stock market which was one of the declared acquisition objectives. We use the Kolmogorov–Smirnov and the Wilcoxon tests to compare market-wide liquidity in several discrete periods pre and post acquisition. A deep and thorough insight into liquidity performance is ensured by assessing liquidity from limit order book data of tick frequency along three dimensions (tightness, immediacy, and elasticity).

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