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Strategic fragmented markets

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  • Babus, Ana
  • Parlatore, Cecilia

Abstract

We study the determinants of asset market fragmentation in a model with strategic investors that disagree about the value of an asset. Investors’ choices determine the market structure. Fragmented markets are supported in equilibrium when disagreement between investors is low. In this case, investors take the same side of the market and are willing to trade in smaller markets with a higher price impact to face less competition when trading against a dealer. The maximum degree of market fragmentation increases as investors’ priors are more correlated. Dealers can benefit from fragmentation, but investors are always better off in centralized markets.

Suggested Citation

  • Babus, Ana & Parlatore, Cecilia, 2022. "Strategic fragmented markets," Journal of Financial Economics, Elsevier, vol. 145(3), pages 876-908.
    • Handle: RePEc:eee:jfinec:v:145:y:2022:i:3:p:876-908
    DOI: 10.1016/j.jfineco.2021.08.022
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    Cited by:

    1. Babus, Ana & Hachem, Kinda, 2023. "Markets for financial innovation," Journal of Economic Theory, Elsevier, vol. 208(C).
    2. Nina Boyarchenko & David O. Lucca & Laura Veldkamp, 2016. "Taking Orders and Taking Notes: Dealer Information Sharing in Treasury Markets," NBER Working Papers 22461, National Bureau of Economic Research, Inc.
    3. 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).
    4. Sarah Draus, 2012. "Market Power on Exchanges: Linking Price Impact to Trading Fees," CSEF Working Papers 490, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    5. Marzena Rostek & Ji Hee Yoon, 2021. "Exchange Design and Efficiency," Econometrica, Econometric Society, vol. 89(6), pages 2887-2928, November.

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    More about this item

    Keywords

    Market fragmentation; Disagreement; Interdealer trading; Price impact; Demand schedule equilibrium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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