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FRM Part II · FRM Exam Part II · Tokenization and Financial Market Inefficiencies

A supervisor notes that a tokenized bond trades on several fragmented blockchain platforms that are not interoperable. Which market-structure concern is MOST directly implied?

The main concern is liquidity fragmentation. Splitting trading across non-interoperable platforms divides order flow, widens spreads and weakens price discovery, potentially reproducing the inefficiencies tokenization aims to remove. It does not create netting or eliminate settlement risk, and it generally adds operational complexity.

  1. ALiquidity fragmentation that can widen spreads and impair price discoveryCorrect
  2. BElimination of settlement risk across all platforms
  3. CAutomatic netting of positions across venues
  4. DLower operational risk because of platform diversity

Explanation

When the same asset trades on separate non-interoperable ledgers, liquidity is split, which widens bid-ask spreads and weakens price discovery. Fragmentation does not create cross-venue netting or remove settlement risk, and it typically adds operational complexity rather than reducing it.

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