Consolidation, Fragmentation, and the Disclosure of Trading Information

Posted: 12 Sep 1994

Multiple version iconThere are 2 versions of this paper

Date Written: August 1994


It is commonly believed that fragmented security markets have a natural tendency to consolidate. This paper examines this hypothesis theoretically, focusing on the relation between fragmentation and the disclosure of trading information to market participants. Non-disclosure benefits traders whose orders are filled with multiple trades by reducing their execution costs and can increase dealers' expected profits by reducing direct price competition. Consolidation is not inevitable unless disclosure is mandatory. We also compare and contrast consolidated and fragmented markets. Although prices in a fragmented market may appear efficient "ex post", they may be inefficient because dealers may rationally quote prices that do not equal the expected value of the security. Fragmentation also results in a reversal in the normal intraday pattern in bid-ask spreads and an increase in price volatility.

JEL Classification: G14, G24

Suggested Citation

Madhavan, Ananth, Consolidation, Fragmentation, and the Disclosure of Trading Information (August 1994). Available at SSRN:

Ananth Madhavan (Contact Author)

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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