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Market Fragmentation

Author

Listed:
  • Daniel Chen
  • Darrell Duffie

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

  • Daniel Chen & Darrell Duffie, 2021. "Market Fragmentation," American Economic Review, American Economic Association, vol. 111(7), pages 2247-2274, July.
    • Handle: RePEc:aea:aecrev:v:111:y:2021:i:7:p:2247-74
    DOI: 10.1257/aer.20200829
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    Cited by:

    1. Estelle Cantillon & Aurélie Slechten, 2024. "Market Design for the Environment," NBER Chapters, in: New Directions in Market Design, National Bureau of Economic Research, Inc.
    2. Jason Allen & Milena Wittwer, 2023. "Centralizing Over-the-Counter Markets?," Journal of Political Economy, University of Chicago Press, vol. 131(12), pages 3310-3351.
    3. Bastidon, Cécile & Jawadi, Fredj, 2024. "Trade fragmentation and volatility-of-volatility networks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    4. Huangfu, Bingchao & Liu, Heng, 2025. "Information spillover in markets with heterogeneous traders," Journal of Economic Theory, Elsevier, vol. 223(C).
    5. Anthropelos, Michail & Kardaras, Constantinos, 2024. "Price impact under heterogeneous beliefs and restricted participation," Journal of Economic Theory, Elsevier, vol. 215(C).
    6. Rohit Rahi & Burcu Kapar & Giulia Iori & Eva Camacho & Simone Alfarano & Albert Banal-Estañol, 2024. "Centralized vs Decentralized Markets: The Role of Connectivity," Working Papers 1420, Barcelona School of Economics.
    7. Simone Alfarano & Albert Banal-Estañol & Eva Camacho & Giulia Iori & Burcu Kapar & Rohit Rahi, 2025. "Centralized vs Decentralized Markets: The Role of Connectivity," Working Papers 2025: 13, Department of Economics, University of Venice "Ca' Foscari".
    8. Marzena Rostek & Ji Hee Yoon, 2021. "Exchange Design and Efficiency," Econometrica, Econometric Society, vol. 89(6), pages 2887-2928, November.
    9. Justin Cox & Kathleen P. Fuller & Robert Van Ness, 2024. "Where does ex‐dividend trading occur: An examination of trading venues around dividends," The Financial Review, Eastern Finance Association, vol. 59(1), pages 31-55, February.
    10. Suchismita Mishra & Le Zhao, 2021. "Order Routing Decisions for a Fragmented Market: A Review," JRFM, MDPI, vol. 14(11), pages 1-32, November.
    11. Justin Cox & Bonnie Van Ness & Robert Van Ness, 2022. "The dark side of IPOs: Examining where and who trades in the IPO secondary market," Financial Management, Financial Management Association International, vol. 51(4), pages 1091-1126, December.
    12. Baldauf, Markus & Mollner, Joshua & Yueshen, Bart Zhou, 2024. "Siphoned apart: A portfolio perspective on order flow segmentation," Journal of Financial Economics, Elsevier, vol. 154(C).
    13. Babus, Ana & Hachem, Kinda, 2021. "Regulation and security design in concentrated markets," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 139-151.
    14. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," Journal of Economic Theory, Elsevier, vol. 214(C).
    15. Goyal, Amit & Reed, Adam V. & Smajlbegovic, Esad & Soebhag, Amar, 2025. "Stealthy shorts: Informed liquidity supply," Journal of Financial Economics, Elsevier, vol. 172(C).
    16. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," LSE Research Online Documents on Economics 120479, London School of Economics and Political Science, LSE Library.
    17. Guo, Wen & Liu, Xiaorui, 2022. "Market fragmentation of energy resource prices and green total factor energy efficiency in China," Resources Policy, Elsevier, vol. 76(C).

    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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