Intraday Volatility Smile: Effects of Fragmentation and High Frequency Trading on Price Efficiency

In 2007, the European Markets in Financial Instruments Directive ended the national concentration rule. As a result, market fragmentation has accelerated across multiple trading venues. This paper examines intra-day volatility and price efficiency through the metric of the normalized volatility ratio for the years 2006, 2012 and 2013 for Euronext Paris, BATS and Chi-X Europe. Our findings show that price determination remains inefficient at market openings due to the complexity of price discovery activity following a period of non-trading and heavy information releases. However, we demonstrate that an active participation of high-frequency traders significantly improves market efficiency at opening session.
info:eu-repo/semantics/nonPublished