Market fragmentation and market consolidation: Multiple steady states in systems of adaptive traders choosing where to trade
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Date
2019-06-21
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Journal ISSN
Volume Title
Journal Title
Physical Review E
Volume Title
99
Article Title
062309
Publisher
American Physical Society (APS)
Abstract
Technological progress is leading to proliferation and diversification of trading venues, thus increasing the relevance of the long-standing question of market fragmentation versus consolidation. To address this issue quantitatively, we analyze systems of adaptive traders that choose where to trade based on their previous experience. We demonstrate that only based on aggregate parameters about trading venues, such as the demand-to-supply ratio, we can assess whether a population of traders will prefer fragmentation or specialization towards a single venue. We investigate what conditions lead to market fragmentation for populations with a long memory and analyze the stability and other properties of both fragmented and consolidated steady states. Finally, we investigate the dynamics of populations with finite memory; when this memory is long the true long-time steady states are consolidated but fragmented states are strongly metastable, dominating the behavior out to long times.