"A Tale of One Exchange and Two Order Books: Effects of Fragmentation in the Absence of Competition"

Abstract We study the effects of market fragmentation on market performance when competition between exchanges remains unchanged.  By considering a dynamic model of multiple limit order markets,   we show that market fragmentation has detrimental effects on terms of liquidity and welfare.  Fragmented markets offer higher welfare of speculators as a expense of   investors with intrinsic reasons to trade, wider spreads, and lower price efficiency  than consolidated markets. We also empirically corroborate the main predictions of our model on market quality. Our results suggest that competition in market design, not market fragmentation, drives previous findings of market quality improvements when new trading venues emerge.