Market Fragmentation

61 Pages Posted: 9 Mar 2020

See all articles by Daniel Chen

Daniel Chen

Graduate School of Business, Stanford University

Darrell Duffie

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

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Date Written: March 2020

Abstract

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.

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Suggested Citation

Chen, Daniel and Duffie, James Darrell, Market Fragmentation (March 2020). NBER Working Paper No. w26828. Available at SSRN: https://ssrn.com/abstract=3550977

Daniel Chen (Contact Author)

Graduate School of Business, Stanford University ( email )

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James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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