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Market Fragmentation

Author

Listed:
  • Chen, Daniel

    (Stanford U)

  • Duffie, Darrell

    (Stanford U)

Abstract

We model a simple market setting in which fragmentation of trade of the same asset across multiple exchanges improves allocative efficiency. Fragmentation reduces the inhibiting effect of price-impact avoidance on order submission. Although fragmentation reduces market depth on each exchange, it also isolates cross-exchange price impacts, leading to more aggressive overall order submission and better rebalancing of unwanted positions across traders. Fragmentation also has implications for the extent to which prices reveal traders' private information. While a given exchange price is less informative in more fragmented markets, all exchange prices taken together are more informative.

Suggested Citation

  • Chen, Daniel & Duffie, Darrell, 2020. "Market Fragmentation," Research Papers 3854, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3854
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    File URL: https://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/493871
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    Cited by:

    1. Babus, Ana & Hachem, Kinda, 2021. "Regulation and security design in concentrated markets," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 139-151.

    More about this item

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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