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Market Fragmentation - Coggle Diagram
Market Fragmentation
Cons
Price dispersion - the same security may trade at different prices at the same time at different trading venues
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Investors may also be unable to split their orders optimally across markets, because this requires costly investment in technology or because their brokers lack the incentive to do so
Illiquidity because investors cannot (or do
not) access all the possible trading venues for a security
hinders competition among liquidity providers, by weakening interactions between market makers active in different liquidity pools and thereby decreasing their incentives to offer good quotes
it is harder for investors to locate good prices and the proliferation of “dark pools,” hidden orders on traditional exchanges or automatic trading systems and crossing networks of unknown depth, have compounded the problem
Informed investors can exploit their information more, since it is more difficult to detect if the trades are sent to different venues
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Pros
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enhances “competition for order flow,” by
which markets try to attract buy and sell orders
Not necessarily bad for liquidity. Neither dark trading nor fragmentation between lit order books is found to harm liquidity. (Gresse, 2017)
it fragmentation improves spreads and depth across markets and locally on the primary exchange, or at worst does not affect them.
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