Tumbling Titans? The Changing Patterns of Price Discovery in the U.S. Equity Market

After the implementation of Regulation NMS in 2007, the U.S. equity market became highly fragmented. The traditional exchanges, in particular the New York Stock Exchange (NYSE), lost substantial trading volume to the off-exchange market. We investigate the extent to which this development has been accompanied by a fragmentation of price discovery across established exchanges and off-exchange trading venues. The results of analyzing high frequency data of 91 U.S. stocks over a period of six years show that the contribution of the NYSE to price discovery has sharply declined; as of 2012, it even was overtaken by the Nasdaq. Trading in the off-exchange market also contributes to price discovery with rapidly increasing shares. Using daily estimates, we document a positive link between liquidity and price discovery contributions and offer evidence that liquidity Granger-causes price discovery for NYSE, Nasdaq, and trades reported through trade-reporting facilities