Competition Between Equity Markets: A Review of the Consolidation Versus Fragmentation Debate

SAFE Working Paper No. 35

Forthcoming in the Journal of Economic Surveys

32 Pages Posted: 3 Dec 2013 Last revised: 28 Aug 2016

See all articles by Peter Gomber

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration

Satchit Sagade

Goethe University Frankfurt - Department of Finance; Goethe University Frankfurt - Research Center SAFE

Erik Theissen

University of Mannheim - Finance Area

Moritz Christian Weber

Goethe University Frankfurt Faculty of Economics and Business Administration

Christian Westheide

University of Vienna - Department of Finance; Goethe University Frankfurt - Research Center SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: June 21, 2016

Abstract

Technological advances and regulatory initiatives have led to the emergence of a competitive, but fragmented, equity trading landscape in several markets around the world. While these changes have coincided with benefits like reduced transaction costs, advancements in trading technology, and access to a diverse array of execution venues, regulators and market participants have also raised concerns about the welfare implications of innovations like dark pools as well as the resulting increase in execution complexity. Exchanges are often viewed as natural monopolies due to the presence of network externalities and economies of scale. However, heterogeneity in traders' preferences means that no single venue can serve the interests of all investors. Fragmentation of the marketplace can be seen as a direct outcome of this heterogeneity. In this article we review the theoretical and empirical literature examining the economic arguments and motivations underlying market fragmentation, the resulting implications for liquidity and price efficiency, and the role for public policy. Beyond the concerns for equity markets, the lessons from this literature are relevant for other asset classes experiencing an increase in competition between trading venues.

Keywords: Competition, Fragmentation, Market Structure, Liquidity, Price Discovery

JEL Classification: G10

Suggested Citation

Gomber, Peter and Sagade, Satchit and Theissen, Erik and Weber, Moritz Christian and Westheide, Christian, Competition Between Equity Markets: A Review of the Consolidation Versus Fragmentation Debate (June 21, 2016). SAFE Working Paper No. 35. Available at SSRN: https://ssrn.com/abstract=2362216 or http://dx.doi.org/10.2139/ssrn.2362216

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.efinancelab.de/no_cache/team/?user_wiwipubs_pi2[showUid]=478

Satchit Sagade (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany
+49 69 798 30085 (Phone)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 30085 (Phone)

Erik Theissen

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Moritz Christian Weber

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

Christian Westheide

University of Vienna - Department of Finance ( email )

Bruennerstrasse 72
Vienna, 1210
Austria

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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