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Market fragmentation and market consolidation: Multiple steady states in systems of adaptive traders choosing where to trade

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  • Aleksandra Alori'c
  • Peter Sollich

Abstract

Technological progress is leading to proliferation and diversification of trading venues, thus increasing the relevance of the long-standing question of market fragmentation versus consolidation. To address this issue quantitatively, we analyse systems of adaptive traders that choose where to trade based on their previous experience. We demonstrate that only based on aggregate parameters about trading venues, such as the demand to supply ratio, we can assess whether a population of traders will prefer fragmentation or specialization towards a single venue. We investigate what conditions lead to market fragmentation for populations with a long memory and analyse the stability and other properties of both fragmented and consolidated steady states. Finally we investigate the dynamics of populations with finite memory; when this memory is long the true long-time steady states are consolidated but fragmented states are strongly metastable, dominating the behaviour out to long times.

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  • Aleksandra Alori'c & Peter Sollich, 2019. "Market fragmentation and market consolidation: Multiple steady states in systems of adaptive traders choosing where to trade," Papers 1902.06549, arXiv.org, revised Jun 2019.
    • Handle: RePEc:arx:papers:1902.06549
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    File URL: http://arxiv.org/pdf/1902.06549
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    Cited by:

    1. Robin Nicole & Aleksandra Alori'c & Peter Sollich, 2020. "Fragmentation in trader preferences among multiple markets: Market coexistence versus single market dominance," Papers 2012.04103, arXiv.org, revised Aug 2021.

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