I get your point, but market fragmentation must not necessarily translate into a worsening of liquidity compared to having one consolidated order book. We have the technological means where investors can gain access to multiple trading platforms simultaneously at low cost, including low search costs for investors (to identify the lowest possible price to execute a particular order).
One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as “marketability” and “liquidity”, sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear). But investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pickpocket of enterprise.
Former U.S. Fed chief Paul Volcker also made similar remarks about “too much liquidity” regarding the bond market if I remember that correctly.
… there exists a threshold, above which the marginal effect of financial liquidity on economic growth changes from positive to negative. In particular, the turning points for which domestic credit to private sector and stock market turnover start having negative effects on growth are 104% GDP and 107% respectively. Moreover, although the thresholds in middle- and low-income countries are higher than those in high-income countries, the growth-enhancing effect of financial liquidity is stronger in high-income countries.
Having said that, we must also consider the different dimensions of liquidity. Resilience is a strong point (measured by price volatiliy, the Amihud ratio) or the immediacy (e.g., the number of market makers, possibly related to the number of market participants), and many other metrics.
So I am not sure whether a consolidation of stock markets is a good thing, especially not for the long-term investor.
I get your point, but market fragmentation must not necessarily translate into a worsening of liquidity compared to having one consolidated order book. We have the technological means where investors can gain access to multiple trading platforms simultaneously at low cost, including low search costs for investors (to identify the lowest possible price to execute a particular order).
Maybe more importantly, many long-term investors would argue that there can also be too much liquidity. Among my favorite citations regarding this has been for years Warren Buffet’s Berkshire Hathaway shareholder letter of 1983:
Former U.S. Fed chief Paul Volcker also made similar remarks about “too much liquidity” regarding the bond market if I remember that correctly.
There is also a more recent study investigating this issue. In, “Is too much liquidity harmful to economic growth?”, the authors conclude:
Having said that, we must also consider the different dimensions of liquidity. Resilience is a strong point (measured by price volatiliy, the Amihud ratio) or the immediacy (e.g., the number of market makers, possibly related to the number of market participants), and many other metrics.
So I am not sure whether a consolidation of stock markets is a good thing, especially not for the long-term investor.
[Edit typo.]