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Equity trading: Like a horse and buggy in the Daytona 500

Despite the volume of high-profile mergers and acquisitions between exchanges, the number of trading venues in the US is an astonishing 55 and rising. According to industry consultant Larry Tabb: "The US financial markets are not just in flux; they are in full-out, no holds-barred, free-for-all radical change." Moreover, it is a trend that he believes is likely to be exported.

Nasdaq’s recent acquisitions of the Philadelphia and Boston exchanges and NYSE Euronext’s acquisition of the American Stock Exchange are prime examples of consolidation at the ownership level that have not led to a decrease in fragmentation. Although both groups have announced that they will attempt to consolidate operations and technologies, neither plans to eliminate markets or to consolidate liquidity pools, despite the benefits of increased scale that would result, which were often cited in the past as the main rationale for exchange mergers.

The reason is that what exchanges and other trading venues have discovered is that a consolidation of platforms tends to significantly reduce volumes because it eliminates arbitrage trades, which account for a significant proportion of total trading volumes. In the US, many statistical arbitrage funds and electronic market makers make their living from exploiting tiny price discrepancies in shares being quoted on different trading venues.

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