A Comparison of Centralized and Fragmented Markets with Costly Search

42 Pages Posted: 23 Jun 2004

See all articles by Xiangkang Yin

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: February 25, 2004

Abstract

How does quotation transparency affect financial market performance? Biais' (1993) irrelevance proposition shows that centralized markets yield the same expected bid-ask spreads as fragmented markets, other things equal. However, de Frutos and Manzano (2002) demonstrate that expected spreads in fragmented markets are smaller and market participants prefer to trade in fragmented markets. This paper introduces liquidity traders' costs of searching for a better quote into the Biais model and derives opposite conclusions to these previous studies: expected spreads in centralized markets are smaller and liquidity traders prefer centralized markets while market makers prefer fragmented markets.

Keywords: search cost, inventory position, market transparency, ask-bid spread, centralized market, fragmented market

JEL Classification: G14

Suggested Citation

Yin, Xiangkang, A Comparison of Centralized and Fragmented Markets with Costly Search (February 25, 2004). Available at SSRN: https://ssrn.com/abstract=525262 or http://dx.doi.org/10.2139/ssrn.525262

Xiangkang Yin (Contact Author)

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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