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

## TL;DR

This paper models how adaptive traders choose trading venues, revealing conditions that lead to either fragmented or consolidated markets and analyzing the stability and dynamics of these states.

## Contribution

It provides a quantitative analysis of market fragmentation versus consolidation, identifying conditions for steady states based on aggregate venue parameters.

## Key findings

- Long memory promotes consolidated steady states.
- Fragmented states are metastable with long memory.
- Finite memory leads to long-term consolidation despite metastability.

## 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 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.