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Market Fragmentation Fragmented-Market-2 - Coggle Diagram
Market Fragmentation
Cons
Can lead to excessive “price dispersion
Outright arbitrage opportunities may arise (sign of dysfunctional market)
High cost for investors
Investors will not be able to take the fully use of "thick market externalities"
Cost in identifying best price
Expensive technology
Time lag
agency problems between brokers and investors
Exploitation of information
Need frequent Strategy Updates
imperfect risk sharing
not all traders have access to all venues
assymetric information
different prices for the same security
less transparancy
'cream-skimming-effect"
price impact of big dark trades
Pros
helps break the monopoly
lower trading fees
increased liquidity
(the power of one venue)
(conflict of interests in pricing)
tech development in trading
competition encourages venues to improve
faster and safer transactions
leads to higher competition among liquidity providers
consolidated liquidity is increased
thanks to the ability of liq-demanders to use splitting strategies
thanks to the ability of liq-providers to work at different venues at the same time
the possiblity of queue-jumping
liquidity providers compete on a finer pricing grid
different tick sizes between the venues
Trade-throughs
a possible solution to the chicken-egg paradox in the market
Impact of Dark trading and Visible fragmentation on market quality
Dark venues
Visible venues
