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A Comparison of Centralized and Fragmented Markets with Costly Search

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  • XIANGKANG YIN

Abstract

How does quotation transparency affect financial market performance? Biais's irrelevance proposition in 1993 shows that centralized markets yield the same expected bid–ask spreads as fragmented markets, other things equal. However, de Frutos and Manzano demonstrated in 2002 that expected spreads in fragmented markets are smaller and market participants prefer to trade in fragmented markets. This paper introduces liquidity traders' costs of searching for a better quote into the Biais model and derives opposite conclusions to these previous studies: expected spreads in centralized markets are smaller and liquidity traders prefer centralized markets, while market makers prefer fragmented markets.

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  • Xiangkang Yin, 2005. "A Comparison of Centralized and Fragmented Markets with Costly Search," Journal of Finance, American Finance Association, vol. 60(3), pages 1567-1590, June.
    • Handle: RePEc:bla:jfinan:v:60:y:2005:i:3:p:1567-1590
    DOI: 10.1111/j.1540-6261.2005.00770.x
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    Cited by:

    1. Dr. Andrada Bilan & Yalin Gündüz, 2022. "CDS market structure and bond spreads," Working Papers 2022-09, Swiss National Bank.
    2. Menkveld, Albert J., 2008. "Splitting orders in overlapping markets: A study of cross-listed stocks," Journal of Financial Intermediation, Elsevier, vol. 17(2), pages 145-174, April.
    3. repec:uts:finphd:39 is not listed on IDEAS
    4. Marta Khomyn, 2020. "Essays on Modern Market Structure," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2020, January-A.
    5. Daures-Lescourret, Laurence & Moinas, Sophie, 2023. "Fragmentation and Strategic Market-Making," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(4), pages 1675-1700, June.
    6. He, Yinghua & Nielsson, Ulf & Guo, Hong & Yang, Jiong, 2014. "Subscribing to transparency," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 189-206.
    7. Ramiro Losada López, 2010. "On the role of transparency in the ABS secondary market," CNMV Working Papers CNMV Working Papers no. 3, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    8. Pham, Thu Phuong & Westerholm, P. Joakim, 2013. "A survey of research into broker identity and limit order book," Working Papers 17212, University of Tasmania, Tasmanian School of Business and Economics, revised 16 Oct 2013.
    9. Olfa Berrich & Halim Dabbou, 2023. "Tunisian corporate bond market liquidity: a qualitative approach," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 15(5), pages 795-819, February.
    10. Paulo Pereira da Silva & Isabel Vieira, 2024. "Stock price informativeness and credit default swap trading," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2950-2970, July.
    11. Allen, Linda & Gottesman, Aron A. & Peng, Lin, 2012. "The impact of joint participation on liquidity in equity and syndicated bank loan markets," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 50-78.
    12. Lescourret, Laurence & Robert, Christian Y., 2011. "Transparency matters: Price formation in the presence of order preferencing," Journal of Financial Markets, Elsevier, vol. 14(2), pages 227-258, May.
    13. Paulo Pereira Silva, 2018. "Fragmentation and Market Quality: The Case of European Markets," De Economist, Springer, vol. 166(2), pages 179-206, June.
    14. Comerton-Forde, Carole & Putniņš, Tālis J., 2015. "Dark trading and price discovery," Journal of Financial Economics, Elsevier, vol. 118(1), pages 70-92.
    15. Fei Su, 2018. "Essays on Price Discovery and Volatility Dynamics in the Foreign Exchange Market," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2018, January-A.
    16. Zhuo Zhong & Kei Kawakami, 2016. "The Risk Sharing BenefiÂ…t versus the Collateral Cost: The Formation of the Inter-Dealer Network in Over-the-Counter Trading," 2016 Meeting Papers 822, Society for Economic Dynamics.
    17. Su, Fei & Zhang, Jingjing, 2018. "Global price discovery in the Australian dollar market and its determinants," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 35-55.
    18. Paulo Pereira da Silva & Carlos Vieira & Isabel Vieira, 2018. "Central clearing and CDS market quality," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(6), pages 731-753, June.
    19. repec:uts:finphd:38 is not listed on IDEAS
    20. Zhong, Zhuo, 2016. "Reducing opacity in over-the-counter markets," Journal of Financial Markets, Elsevier, vol. 27(C), pages 1-27.

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