Stock Market Consolidation with Investor Heterogeneity

Abstract: We investigate the impact on different types of investors of market consolidation and fragmentation, thought of as the number of objects listed on a stock exchange. We find that, at high levels of fragmentation, there are benefits to consolidation for buyers, as less information for a buyer's competitor enables him to make positive profits. At low levels of fragmentation, however, further consolidation impacts investors negatively. The optimal level of fragmentation depends on investor skill and the degree of correlation between stocks. Furthermore, our results constitute, to the best of our knowledge, new findings that are generally applicable to the theory of multiple correlated second-price sealed-bid auctions.