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Strategic Fragmented Markets

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  • Babus, Ana
  • Parlatore Siritto, Cecilia

Abstract

We study the determinants of asset market fragmentation. We develop a model of market formation in which investors with heterogeneous valuations for an asset trade strategically. When choosing a dealer with whom to trade, investors trade off the lower price impact and the steeper competition for the dealer's liquidity offered by a larger market. When the correlation among investor valuations is high, the increase in competition dominates the decrease in price impact and investors prefer to trade in a smaller market, which makes market fragmentation an equilibrium outcome. Fragmented market structures can Pareto dominate centralized ones and can exhibit higher trading volumes.

Suggested Citation

  • Babus, Ana & Parlatore Siritto, Cecilia, 2016. "Strategic Fragmented Markets," CEPR Discussion Papers 11591, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11591
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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. Marzena Rostek & Ji Hee Yoon, 2021. "Exchange Design and Efficiency," Econometrica, Econometric Society, vol. 89(6), pages 2887-2928, November.
    4. 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).
    5. 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.

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    More about this item

    Keywords

    Market fragmentation; Interdealer trading; 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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