INTEGRATED AND FRAGMENTED(SEGMENTED) SECONDARY STOCK MARKETS

INTEGRATED AND FRAGMENTED(SEGMENTED) 

SECONDARYSTOCK MARKETS

There can be different interpretations of what

constitutes an integrated secondary stock market and

what - in contrast - constitutes a fragmented one.

Generally speaking, an integrated secondary market

would be one that was a single uniform entity covering

all dealings in certain securities already in

circulation. Admittedly, even in this  straightforward 

case one could distinguish between functional sectors -

such as the information and decision-taking sphere,

the execution sphere and the settlement and custody

sphere - but procedures within these sectors would

follow a single pattern: the chain of events from the

decision to purchase through to payment would in

principle have the same kind and number of links in

every case. In a less straightforward but more

realistic case the. links may differ. It then no

longer matters whether the investor receives advice

and if so from whom, whether an order is executed

by a bank or a specialized security-dealing firm or

both together, whether one or several trading

techniques are available to execute orders, or

whether more than one method of clearing the transaction

is used; theimportant point is whether all the existing

elements are brought together to form an orderly whole,

to form a security-market system.

In the straightforward case the "fragmented"  secondary 

market can be clearly defined as the opposite of the

integrated market. Under this definition, all existing

markets would of course be more or less fragmented.

Even taking only the execution sphere, different methods

for trading the same or different stocks can be

observed in every country. If we use the second, more

realistic, definition, this difficulty disappears.

There are certainly some secondary markets which can

be described as integrated under this definition. But

then the question arises, fristly, whether, where there

is a high degree of division, a certain lack of

uniformity, we should not speak of fragmented markets.

And secondly, we have to state what criteria shall be

used to decide whether the elements observed can in

fact be regarded as forming part of a whole or not.

The following questions demonstrate how many aspects

may play a part here:

1. Are unofficial dealings by members of a stock

exchange before the exchange has opened or after

it has closed, even if carried on under somewhat

modified rules, a rational complement to dealing

on the floor of the exchange and therefore part

of a system?

2.Should a security-market system provide opportunities

for the purchase and sale of every security, even

for those not admitted to a stock exchange quotation,

and do markets for these securities together with

the stock exchanges constitute an orderly whole?

3. Are stockmarkets at different places, on which the

same securities are traded under more or less the

same rules, parts of a whole? How near to each other

do they have to be located and how different may their

rules be?

4. Is it of any consequence for designating various

parts of a secondary market as "integrated" or

"fragmented" whether, despite different trading

techniques, they serve the same sort of investor,

whether the same security-dealing firms, more or

less, are active on them, whether there are the

same regulations for the admission of securities to

a quotation and/or whether the same clearing

techniques are used or not?

Some aspects always suggest that a market segment belongs

to a certain system of security-dealing, while others

suggest the opposite. For this reason it is not possible

in general to draw a sharp dividing line between

integrated and fragmented stock markets. The same

result is obtained if instead of using the significance

of the word "integrated" as the starting-point one uses

the term "fragmented" as the basis from which to

approach the problem. Fragmented or split markets are

well-known  in foreign exchange business; these are

markets for the same currency between which arbitrage

is not legally possible. But that is of no use for our

present purposes.

The fragmented elements of the secondary stock market

did not come into being through action by the

authorities but historically grew up in response to

the special needs of investors; these markets usually

welcome any arbitrage transactions. In stock exchange

terminology the term "fragmented" rather than "split"

is preferred, and to use more neutral terminology one

should speak of "segmented" markets. But even this

terminological clarification  is no help in finding a

dividing line. Segmented markets are nothing but

non-integrated or less integrated markets.

Obviously, the title of the study fails to set forth

clearly the market structures to be analysed. As the

advantages and disadvantages of integrated versus

fragmented markets are to be brought out, an alternative

way to obtain a clue what the study should focus on is

looking at its intention. This study was commissioned

to investigate whether in a given Member State there

is an integrated secondary stock market - which may be

concentrated in a single stock exchange or spread

over several - or whether the stock market in that

country is split, that is to say whether alongside the

official bourse or bourses there is at least one other

market  (examples: "geregelter Freiverkehr", over-the-

counter market, Ariel; see Annex

 4).This means, first of all, that the study should focus

on the execution sphere. The markets named as examples always reveal different procedures in that sphere; this does not

generally hold for the related other functional spheres.

In addition, the following questions are asked:

1. What are the advantages and disadvantages of not

including certain groups of circulating securities

- IS in stock exchange dealing but trading them  outside 

the  exchanges? 

2. What are the resultant advantages and  disadvantages 

if securities, trading  in which on the stock  exchanges 

is permitted, are dealt  in not on the  exchanges 

but by traditional methods or by automated  methods 

outside the  exchanges? 

3. What advantages or disadvantages  accrue if a

security  is traded  simultaneously  on several  stock 

exchanges with  the same or different  dealing 

techniques?

In order to prepare answers  to these questions, we  shall 

first, in the second part of the study, examine  the 

secondary  stock markets of the Member States to  see 

what solutions  are found there  in the execution  sphere, 

in other words what stock-exchange  and non-stock-

exchange market-segments  exist there. A  complete 

description  and analysis  of the markets  in the Member

States  in this connexion  is neither necessary  nor 

intended.  It is more important to get an idea of the

effects that different methods have on the cost of

processing  an order, particularly  on the cost of

securing  the best price available, the cost of  guarding 

against realization  risks in the execution  sphere  and 

the cost of immediacy. Finally, in Part  3, we  shall 

set out the reasons why secondary  stock markets  are 

segmented  in different degrees  and what advantages  and 

disadvantages  flow from these different degrees of

segmentation.

 the source by Dr.Hartmut Schmidt