Fragmentation and stability of markets

•Computational model in which skills are endogenous.•Market structure governs distribution of skills.•Centralising markets harms price discovery.•Fragmented markets are more resilient to shocks. Trading skills are highly rewarded in practice but largely ignored in theoretical models of financial markets. This paper demonstrates the importance of skills by examining their interaction with market fragmentation and market stability. We consider a computational model where traders’ abilities to accurately price assets are endogenous. In contrast to models that do not consider skills, we find that centralising markets can lead to higher price volatility and less resilience to shocks because it increases the equilibrium proportion of unskilled traders.