Effects of lit and dark market fragmentation on liquidity

Based on data from eight stock exchanges and a trade reporting facility for London Stock Exchange- and Euronext-listed equities, I investigate how lit and dark market fragmentation affects liquidity. Neither dark trading nor fragmentation between lit order books is found to harm liquidity. Lit fragmentation improves spreads and depth across markets and locally on the primary exchange, or at worst does not affect them. Benefits are greater for large stocks and stocks with less electronic trading. Lit fragmentation however harms the depth of small stocks. The adverse effects on the depth of large stocks result from algorithmic trading, not fragmentation.