Please enable JavaScript.
Coggle requires JavaScript to display documents.
Market Fragmentation, Agency problem - Coggle Diagram
Market Fragmentation
Cons
Traders
Hinders competition among liquidity providers
Raised trading costs for investors
Increases informed investors ability to exploit information which makes it harder for other traders
Investors have to conduct a search for the best price
time consuming
Increases agency problems between investors and brokers
Prevents investors from taking full advantage of the thick market externalities
Unlikely that the socially optimal amount of market fragmentation will arise spontaneously
Market fragmentation is high on the regulatory agenda
Price dispersion
Less transparency
Trading platform
Costs
Costs incurred for brokers to find best trades for traders.
Difficult to charge traders for this.
Competition forces expensive investments in tech
Liquidity issues
Liquidity begets liquidity - Gravitational pull
High barriers for entry - Need critical mass to function well
Reduced spreads
Monopoly position lost - competition decreases trading fees
Pros
Traders
Different trading needs of investors can be best served by different trading mechanisms
Increases competition (Gresse, 2017)
Reduces trading fees
Fosters inovation in trading technology
Removes monopolies
Increases liquidity (Gresse, 2017)
Ability to exploit information
Traders can provide liquidity where it is most profitable and cheapest
Liquidity rebates
Trading platform
Price discovery is better with several markets
Increased consolidated liquidity
Fosters improvement of platforms / innovation
Dark pools
Can meet the needs of other traders
Agency problem