Trading in Fragmented Markets

Journal of Financial and Quantitative Analysis, Vol. 56, No. 1 (February 2021), pp. 93–121.

75 Pages Posted: 22 May 2016 Last revised: 14 Jan 2021

Date Written: September 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 opposing 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% 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 (September 5, 2019). Journal of Financial and Quantitative Analysis, Vol. 56, No. 1 (February 2021), pp. 93–121., 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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