[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.]

Journal Article Consolidation, Fragmentation, and the Disclosure of Trading Information Get access Ananth Madhavan Ananth Madhavan University of Southern California Address all correspondence to Ananth Madhavan, School of Business Administration, University of Southern California, Los Angeles, CA 90089-1421. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 8, Issue 3, July 1995, Pages 579–603, https://doi.org/10.1093/rfs/8.3.579 Published: 28 May 2015

Restrictions on transaction price changes are a feature of many security markets. This paper analyzes the impact of such price continuity rules on price dynamics and examines possible rationales for their existence. Contrary to popular belief, continuity rules need not reduce price efficiency, although they do result in a redistribution of profits among traders and dealers.- Indeed, continuity rules may enhance price efficiency because traders have greater incentives to gather costly information. We provide a new rationale for continuity rules besides the stated objective of stabilizing prices. In particular, we show that continuity requirements act to restrict dealers' expected profits from trading with liquidity traders. The results provide insights into the design of an optimal continuity rule.

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