Consolidation, Fragmentation, and the Disclosure of Trading Information

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Abstract
It is commonly believed that fragmented security markets have a natural tendency to consolidate. This article examines this belief, focusing on the effect of disclosing trading information to market participants. We show that large traders who place multiple trades can benefit from the absence of trade disclosure in a fragmented market, as can dealers who face less price competition than in a unified market. Consequently, a fragmented market need not coalesce into a single market unless trade disclosure is mandatory. We also compare and contrast fragmented and consolidated markets. Fragmentation results in higher price volatility and violations of price efficiency.

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