Specialization in Financial Markets

Financial markets are fragmented, with different asset classes trading in separate markets. Yet most empirical asset pricing research pays little attention to this type of fragmentation. As a result, we know relatively little about how financial intermediaries operate across markets or how to design policies that account for cross-market dynamics. We construct a unique dataset that traces trading by registered broker-dealers and exchange members---dealers---across all major Canadian markets for bonds, stocks, and derivatives. We show that dealers concentrate their activity in specific markets and asset types, with stronger specialization across markets. We provide suggestive evidence that this specialization reflects a mix of firm organization, market frictions, and client demand, and show that more specialized dealers consistently obtain better prices, indicating a trading advantage.