Market Fragmentation

77 Pages Posted: 24 Feb 2020 Last revised: 26 May 2020

See all articles by Daniel Chen

Daniel Chen

Princeton University

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Multiple version iconThere are 2 versions of this paper

Date Written: February 19, 2020


We model a simple market setting in which fragmentation of trade of the same asset across multiple exchanges improves allocative efficiency. Fragmentation reduces the inhibiting effect of price-impact avoidance on order submission. Although fragmentation reduces market depth on each exchange, it also isolates cross-exchange price impacts, leading to more aggressive overall order submission and better rebalancing of unwanted positions across traders. Fragmentation also has implications for the extent to which prices reveal traders’ private information. While a given exchange price is less informative in more fragmented markets, all exchange prices taken together are more informative.

Keywords: market fragmentation, price impact, allocative efficiency, price discovery

Suggested Citation

Chen, Daniel and Duffie, James Darrell, Market Fragmentation (February 19, 2020). Stanford University Graduate School of Business Research Paper No. 3854, Available at SSRN: or

Daniel Chen

Princeton University ( email )

United States

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Canadian Derivatives Institute ( email )

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