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Abstract

We analyze a dynamic microstructure model in which a dealer market (DM) and a crossing network (CN) interact for three informational settings. A key result is that coexistence of trading systems generates systematic patterns in order flow, which depend on the degree of transparency. Further, we study overall welfare, measured by the gains from trade of all agents, and compare it with the maximum overall welfare. The discrepancy between both measures is attributable to two inefficiencies. Due to these inefficiencies, introducing a CN next to a DM, as well as increasing the transparency level, not necessarily produces greater overall welfare.

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File URL: http://www.sciencedirect.com/science/article/B6VBX-4V0TD7M-1/2/3c99575739dd55e0e1535f7b54110e7e
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 91 (2009)
Issue (Month): 3 (March)
Pages: 319-338

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Handle: RePEc:eee:jfinec:v:91:y:2009:i:3:p:319-338

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Alternative trading systems Crossing network Order flow Transparency Welfare;

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Find related papers by JEL classification:

• G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
• G20 - Financial Economics - - Financial Institutions and Services - - - General

References

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Cited by:

1. Van Beveren, Ilke & Bernard, Andrew B & Blanchard, Emily J & Vandenbussche, Hylke, 2011. "Carry-along trade," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/387875, Katholieke Universiteit Leuven.
   
   • Bernard, Andrew B. & Blanchard, Emily & van Beveren, Ilke & Vandenbussche, Hylke, 2012. "Carry-Along Trade," CEPR Discussion Papers 9067, C.E.P.R. Discussion Papers.
   • Van Beveren, Ilke & Bernard, Andrew B. & Blanchard, Emily J. & Vandenbussche, Hylke, 2011. "Carry-Along Trade," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/319741, Katholieke Universiteit Leuven.
   • Andrew B. BERNARD & Emily J. BLANCHARD & Ilke VAN BEVEREN & Hylke Y. VANDENBUSSCHE, 2012. "Carry-Along Trade," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2012020, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
   • Andrew B. Bernard & Emily J. Blanchard & Ilke Van Beveren & Hylke Y. Vandenbussche, 2012. "Carry-Along Trade," NBER Working Papers 18246, National Bureau of Economic Research, Inc.
   • Bernard, Andrew B & Blanchard, Emily J & Van Beveren, Ilke & Vandenbussche, Hylke, 2012. "Carry-along trade," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/387876, Katholieke Universiteit Leuven.
2. Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2011. "Dark Pool Trading Strategies," Working Papers 421, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
3. Joachim Keller, 2008. "Agency problems in structured finance – a case study of European CLOs," Working Paper Document 137, National Bank of Belgium.
4. Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2012. "Internalization, Clearing and Settlement, and Liquidity," CEPR Discussion Papers 8765, C.E.P.R. Discussion Papers.
   
   • Degryse, H.A. & Achter, M. van & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Discussion Paper 2012-001, Tilburg University, Tilburg Law and Economic Center.
   • Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2012. "Internalization, clearing and settlement, and liquidity," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/335865, Katholieke Universiteit Leuven.
   • Degryse, H.A. & Achter, M. van & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Discussion Paper 2012-002, Tilburg University, Center for Economic Research.
5. Cantillon, Estelle & Yin, Pai-Ling, 2011. "Competition between exchanges: A research agenda," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 329-336, May.
   
   • Estelle Cantillon & Pai-Ling Yin, 2011. "Competition between Exchanges: A research Agenda," ULB Institutional Repository 2013/99386, ULB -- Universite Libre de Bruxelles.
6. Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2005. "Crossing networks: Theory and evidence," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/203055, Katholieke Universiteit Leuven.
7. Kervel, V.L. van, 2013. "Competition between stock exchanges and optimal trading," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5663709, Tilburg University.
8. Degryse, H.A., 2007. "Competition on Financial Markets: Does Market Design Matter?," Discussion Paper 2007-004, Tilburg University, Tilburg Law and Economic Center.
9. Jutta Dönges & Frank Heinemann & Tijmen R. Daniëls, 2013. "Crossing Network versus Dealer Market: Unique Equilibrium in the Allocation of Order Flow," SFB 649 Discussion Papers SFB649DP2013-007, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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