Market fragmentation and market consolidation: Multiple steady states in systems of adaptive traders choosing where to trade

TY - JOUR

T1 - Market fragmentation and market consolidation: Multiple steady states in systems of adaptive traders choosing where to trade

AU - Alorić, Aleksandra

AU - Sollich, Peter

PY - 2019/7

Y1 - 2019/7

N2 - 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 analyse 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 analyse 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 behaviour out to long times.

AB - 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 analyse 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 analyse 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 behaviour out to long times.

UR - http://www.scopus.com/inward/record.url?scp=85068417592&partnerID=8YFLogxK

U2 - 10.1103/PhysRevE.99.062309

DO - 10.1103/PhysRevE.99.062309

M3 - Article

SN - 2470-0045

VL - 99

JO - Physical Review E - Statistical, Nonlinear, and Soft Matter Physics

JF - Physical Review E - Statistical, Nonlinear, and Soft Matter Physics

IS - 6

M1 - 062309

ER -