Trading in Fragmented Markets

Markus Baldauf*, Joshua Mollner

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

We study fragmentation of equity trading using a model of imperfect competition among exchanges. In the model, increased competition drives down trading fees. However, additional arbitrage opportunities arise in fragmented markets, intensifying adverse selection. Due to these opposing forces, the effects of fragmentation are context-dependent. To empirically investigate the ambiguity in a single context, we estimate key parameters of the model with order-level data for an Australian security. At the estimates, the benefits of increased competition are outweighed by the costs of multi-venue arbitrage. Compared to the prevailing duopoly, we predict the counterfactual monopoly spread to be 23% lower.

Original languageEnglish (US)
JournalJournal of Financial and Quantitative Analysis
DOIs
StateAccepted/In press - Jan 1 2019

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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