Trading in Fragmented Markets

78 Pages Posted: 22 May 2016 Last revised: 7 Feb 2019

Date Written: February 5, 2019


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. These op- posing forces imply that 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 percent lower.

Keywords: exchange competition, fragmenation, high-frequency trading, liquidity, bid-ask spread

JEL Classification: D43, D47, G18

Suggested Citation

Baldauf, Markus and Mollner, Joshua, Trading in Fragmented Markets (February 5, 2019). Available at SSRN: or

Markus Baldauf (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2

Joshua Mollner

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

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