Different customers have different needs according to their own choices and requirements. There are chances that the products which are available in a particular market do not address the specific requirements of an individual or a group of individuals, this gives rise to different fragments within a particular market which are made to address these particular needs.
Market fragmentation can be described as the development of small new market segments within a saturated market.
The most popular example of such markets is the introduction of different Dark Pool trading exchanges in different countries, which are used by potential investors/divestors to buy or sell equities in a particular company on a platform other than the standardized exchange.
Another example would be the different types of restaurants developed, having their unique specialty like Chinese or Continental or other Fast foods chains etc.
Is Fragmentation A Threat for the Markets?
It is debatable whether fragmentation is a threat itself for the market it is born in. Although these markets initially consist of only a small pool of customers, there are chances where these small fragments may grow rapidly and become a larger market itself and thus may damage the original market and may also divert a number of customers towards itself, which shall result in a decreasing market share for the existing market leaders and they may need to upgrade or change certain aspects about their services or products .
Secondly, fragmented markets such as Dark Pool trading exchanges have hurt the efficiency of the standardized markets as they are not transparent about their dealings with customers and this has become an ongoing problem for the standardized exchange markets.
Is it a Good Investment?
Despite the available flexibility, it is questionable whether fragments are actually a good investment or not, especially for institutional holders. Although customized markets prefer the specific needs of its individual customers, it lacks overall transparency which can have major adverse impact on its customers. There are instances where these markets may also lack certainty of the completion of an order which adds a very high risk for the investor.
It is also debatable whether these fragments are as profitable as a standardized market or not as they usually consist of a small bundle of customers and thus the orders are very limited and have high costs such as overheads. On the other hand, a standardized market will surely have larger number of orders and has more potential of profitability.