Equity markets are evolving rapidly. The technology of financial intermediation has changed from monopolistic (manual) market makers to multiple algorithms providing liquidity in competing order books, both visible and dark. Has this changed market quality? To answer this, we need measures of market quality (liquidity) invariant to technological innovation in intermediation. In particular, innovation has led to a huge drop in order sizes due to order splitting. Orders are spread out both in time and across exchanges. We use data from the US and Norway to show that the last two decades' marked fall in average spreads is driven by the decline in transaction sizes. Using alternative estimators of transaction costs less sensitive to trade size, such as the Corwin and Schultz (2012) and Abdi and Ranaldo (2017) high/low estimators, we show that equity market quality has improved less than commonly thought.
Keywords: Equity Trading Costs, Spread, High/Low Estimator
JEL Codes: G10; G12; G20; G23