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Market fragmentation - Coggle Diagram
Market fragmentation
Pros
Improved price discovery - multiple signals from different markets
Competition between liquidity providers
Allows "queue jumping"
Increases liquidity for those that are able to trade at multiple venues
Increases the number of liquidity providers
Competition among platforms
Induces innovation which benefits trading
Reducing fees
Mechanisms that serve different trading needs
Fragmentation counteracts monopolistic price settings
Incentive for policymakers to regulate and uphold a fair market structure
Cons
Increased trading costs/decreased liquidity
When informed traders uses multiple trading venues it becomes harder for uninformed traders to infer information from the orderflow
Enables liquidity providers to gain local market power
Risk-sharing decreases
The cost of finding the best quotes increases
May prevent positive "liquidity externalities"
Decreased profits for liquidity traders, while increasing for informed traders
Fragmented markets have less depth
Reduces the incentives for liquidity providers to offer good quotes
Price dispersion
Different prices for the same security, at different venues simultaneously
Arbitrage opportunities