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Market Fragmentation, Pro's, Con's - Coggle Diagram
Market Fragmentation
[Impact of dark trading
= Both 'Pro' and 'Con']
Pro's
Lower trading charges/ other fee's for dealer's
Improve quality of markets
More fragmented stocks have lower transaction costs due to the notion that no-one has much influence over the fragmented marktes, it is easy to enter
Innovation and digitalization
New trading technologies
Trading mode and more accessible through the apps for all participants,
Algorithms, automation, apps
Innovation determines level of market fragmentation
Digitalisation - creating networks
Faster flow of information
Competition
Removing monopoly
So more players can enter market
Reporting protocols increasing competitive trading
due to the regulations and rules there is more transparency/information available which keeps investors informed
Beneficial for small stocks
Less liquid stocks
no market makers are willing to provide a competitive quote.
Small business owners have more opportunities to compete
Expanded trading increases liquidity
Due to the frequent trading, the liquid assets market price change, which in turn increases liquidity
Intensifies competition between liquidity providers
Increases consolidated liquidity
Reduce effective spreads and increase execution speed
Consumer rights increase
Con's
Excessive "price dispersion"
Increases trading costs for investors
Reduces scope of risk-sharing
Best price search is costly
Takes a lot of time for market makers to find and match ask and bid price
May harm quality of market by reducing liquidity
Too much fragmentation give too many options, create too much competition and may thus make it harder to trade so liquidity is reduced
Digitalization and automation
Increase transparency
Too much information can be problematic for liquidity, so not necessarily a good thing
Too much information/ Asymmetirc info
"cream skimming effect"