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Market Fragmentation

Daniel Chen and Darrell Duffie

No 26828, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We model a simple market setting in which fragmentation of trade of the same asset across multiple exchanges improves allocative efficiency. Fragmentation reduces the inhibiting effect of price-impact avoidance on order submission. Although fragmentation reduces market depth on each exchange, it also isolates cross-exchange price impacts, leading to more aggressive overall order submission and better rebalancing of unwanted positions across traders. Fragmentation also has implications for the extent to which prices reveal traders’ private information. While a given exchange price is less informative in more fragmented markets, all exchange prices taken together are more informative.

JEL-codes: D47 D82 G14 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-des and nep-mst
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Daniel Chen & Darrell Duffie, 2021. "Market Fragmentation," American Economic Review, vol 111(7), pages 2247-2274.

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