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Crossing network versus dealer market: Unique equilibrium in the allocation of order flow

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  • Daniëls, Tijmen R.
  • Dönges, Jutta
  • Heinemann, Frank

Abstract

The allocation of order flow to alternative trading systems can be understood as a game with strategic substitutes between buyers on the same side of the market, as well as one of positive network externalities. We consider the allocation of order flow between a crossing network and a dealer market. We show that small differences in traders' preferences generate a unique switching equilibrium in which patient traders use the crossing network while impatient traders submit orders directly to the dealer market. Our model explains why assets with large turnovers and low price volatility are likely to be traded on crossing networks, while less liquid assets are traded on dealer markets.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 62 (2013)
Issue (Month): C ()
Pages: 41-57

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Handle: RePEc:eee:eecrev:v:62:y:2013:i:c:p:41-57

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Web page: http://www.elsevier.com/locate/eer

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Keywords: Trading platform; Order flow; Strategic complements; Strategic substitutes; Global game;

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Cited by:
  1. M. Alessandra Crisafi & Andrea Macrina, 2014. "Optimal Execution in Lit and Dark Pools," Papers 1405.2023, arXiv.org.

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