This discussion paper led to an article in the <I>Journal of Financial Markets </I> (2013). Volume 16, pages 571-603.<P> This paper links the recent fragmentation in equity trading to high frequency traders (HFTs). It shows how the success of a new market, Chi-X, critically depended on the participation of a large HFT who acts as a modern market-maker. The HFT, in turn, benefits from low fees in the entrant market, but also uses the incumbent market Euronext to offload nonzero positions. It trades, on average, 1397 times per stock per day in Dutch index stocks. The gross profit per trade is €O.88 which is the result of a €1.55 profit on the spread net of fees and a €O.68 'positioning' loss. This loss decomposes into a €0.45 profit on positions of less than five seconds, but a loss of €1.13 on longer duration positions. The realized maximum capital commit- ted due to margin requirements is €2.052 million per stock which implies an annualized Sharpe ratio of 9.35.
