Consolidation, fragmentation and segmentation
The advent and growing sophistication of algorithms means that the pooling of liquidity can be done virtually, so why bother concentrating it on a venue that is widely loathed and could develop into a monopoly?
A few years ago I wrote what I thought was a clever article about the fragmentation of a consolidating market. In it, I tried to explain the contradiction of how more trading venues were springing up in the FX market at the same time as widespread consolidation was reducing the number of banks active in it. I argued that fragmentation was a major reason why the FX market revived and started to grow after a period of what appeared to many as almost terminal decline around the turn of the millennium.
Looking back, it now seems clear that the predictions of many – that the market would move towards an exchange model – were and remain wrong. The FX market has refused to centralise and it has continued to thrive in an extremely fragmented structure.