Market Quality and Contagion in Fragmented Markets

Rohit Rahi, Jean-Pierre Zigrand
2012 Social Science Research Network  
Financial market liquidity has become increasingly fragmented across multiple trading platforms. We propose an intuitive welfare-based market quality metric that can properly aggregate local market conditions across both securities and trading venues. Our analysis rests on a general equilibrium model with segmented markets. Arbitrageurs reap profits by effectively providing intermediation services (i.e. "liquidity"). Our market quality measure is equal to the additional consumption enjoyed by
more » ... mption enjoyed by investors as a result of this intermediation, and can be represented by means of a number of observable proxies. The model is especially well-suited to study the contagion-like effects of liquidity shocks. JEL classification: G10, G20, D52, D53.
doi:10.2139/ssrn.1430573 fatcat:e6nu52byb5c35cxtj6nd2jm6by