The informational effect and market quality impact of upstairs trading and fleeting orders on the Australian Securities Exchange

•PPE is significantly greater in the LOB market than in the upstairs market on the ASX.•Less informed institutional trades are routed upstairs.•Algorithm trading leaves traces of “fleeting orders”.•“Fleeting orders” appear to create a new market segment.•The impact of upstairs market weakens when fleeting orders are removed.

This paper investigates the informational effect of trading and market segmentation on the Australian Securities Exchange (ASX) paying particular attention to the recent phenomenon: fleeting orders.1 Confirming theoretical predictions, this study finds that permanent price effect (PPE) is significantly greater in the central limit order book (LOB) than in the upstairs market and that less informed institutional trades are routed to the upstairs market. It also finds that a well functioning upstairs market often results in lower transaction cost, higher volatility and larger trade size on the ASX. In the context of fleeting orders specifically, it finds the informational effect and market quality impact of upstairs market to be weaker after removing fleeting orders, which subsequently leads to the conclusion that recently introduced execution algorithms, which leave a trace of fleeting orders, often result in lower PPE and are mostly used my uninformed liquidity traders.