The Quality of Electronic Markets

Technical progress in information and communication technologies, increased competition through alternative trading systems, and regulatory actions have significantly changed the trading landscape during the last decade. In this paper, we first provide a conceptual framework to analyze market quality. The framework comprises of external factors, the internal market structure, and specific quantifiable market quality measures. We categorize market quality measures into activity, liquidity, and information. Second, we compare the 1997 IBIS II trading system with the 2009 Xetra system of the Deutsche Boerse Group to exemplary apply our framework. We find that trading strategies have changed, activity has increased, and liquidity has improved for the Xetra system compared to IBIS II. More generally, our case study of the German market shows that, in the context of financial market innovation, the overall market quality has improved over the last couple of years.