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In the nineteenth century, the Paris Bourse struggled to manage counterparty risk, revealing the awkward choices for the regulation of derivatives markets. The exchange, primarily a forward market, instituted a mutual guarantee fund to prevent broker failures from snowballing into a liquidity...
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. We study the effects of such fragmentation on market performance using a dynamic model where agents trade strategically … book. Our results suggest that competition in market design, not fragmentation, drives previously documented improvements … in market quality when new trading venues emerge; in the absence of such competition, market fragmentation is harmful. …
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