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You have the wrong question. The question is: What is the optimal market structure? Trying to strike a balance between the benefits of competition and the trou
by aet 12y ago
You have the wrong question. The question is: What is the optimal market structure? Trying to strike a balance between the benefits of competition and the troubles of market fragmentation. Fragmented markets = HFT + competition. Unified markets = monopoly power + liquidity. You choose...
- tptacek 12y agoWait, why would monopolies on trading venues and market-making provide more liquidity? Shouldn't liquidity be on the other side of the comparison?
- aet 12y agoA single exchange brings all traders together reducing search and monitoring costs and thereby reducing trading costs. The single exchange as a monopoly can extract rents from members and has little incentive to improve stuff, e.g. infrastructure. So the tension is between the monopoly power and the liquidity externality arrising from bringing traders together to the same place. The market makers do not necessarily have a monopoly, they can compete against each other, but face monopoly level fees, potentially. (This is my amateur economic analysis, but I think basically this is what economists think.) A fragmented market increases competition on fees and infrastructure, but traders face search, monitoring costs and the cost of dealing with HFTs.