Competition between equity markets: A review of the consolidation versus fragmentation debate

Peter Gomber, Satchit Sagade, Erik Theissen, Moritz Christian Weber and Christian Westheide

No 35, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: Technological advances and regulatory initiatives have led to the emergence of a competitive, but fragmented, equity trading landscape in several markets around the world. While these changes have coincided with benefits like reduced transaction costs, advancements in trading technology, and access to a diverse array of execution venues, regulators and market participants have also raised concerns about the welfare implications of innovations like dark pools as well as the resulting increase in execution complexity. Exchanges are often viewed as natural monopolies due to the presence of network externalities and economies of scale. However, heterogeneity in traders' preferences means that no single venue can serve the interests of all investors. Fragmentation of the marketplace can be seen as a direct outcome of this heterogeneity. In this article we review the theoretical and empirical literature examining the economic arguments and motivations underlying market fragmentation, the resulting implications for liquidity and price efficiency, and the role for public policy. Beyond the concerns for equity markets, the lessons from this literature are relevant for other asset classes experiencing an increase in competition between trading venues.

Keywords: Competition; Fragmentation; Market Structure; Liquidity; Price Discovery (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2016, Revised 2016
New Economics Papers: this item is included in nep-cse, nep-fmk, nep-his and nep-mst
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: COMPETITION BETWEEN EQUITY MARKETS: A REVIEW OF THE CONSOLIDATION VERSUS FRAGMENTATION DEBATE (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:35

DOI: 10.2139/ssrn.2362216

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