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Auction versus Dealership Markets

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  • Moez Bennouri

Abstract

This paper compares two market structures, namely auction and dealership markets defined respectively as centralized order-driven and fragmented quote-driven markets. Our approach departs from previous works comparing these market mechanisms by considering both the timing of order submission (quote versus order-driven) and trading concentration (centralized versus fragmented) as dimensions di.erentiating these trading structures. We compare markets using measures of market viability, informational e.ciency, price variance, informed trading aggressiveness and market liquidity. We find that this approach changes dramatically the results of previous works comparing these trading structures. Indeed, we prove that auction markets are less sensitive to asymmetric information problem and they exhibit higher level of informational e.ciency than dealership markets. Moreover, we find that the relative magnitude of price variance, informed trading aggressiveness and market depth in both structures depend on the market thickness. Cette étude propose une comparaison entre deux structures d'échanges dans les marchés financiers: les marchés aux enchères et les marchés de contreparties. Les marchés aux enchères sont concentrés et régis par les ordres alors que les marchés de contreparties sont fragmentés et régis par les prix. Par rapport à la littérature, cette comparaison se base sur les deux dimensions qui distinguent les deux structures, à savoir le timing de soumettre des ordres (marchés dirigés par les ordres et marchés dirigés par les prix) et le niveau de concentration dans les deux marchés (centralisation et fragmentation). De plus, la comparaison utilise différentes mesures de performances des marchés: robustesse aux problèmes d'asymétrie d'information, efficience informationnelle, variance des prix, agressivité des ordres des informés et la liquidité du marché. On montre que l'utilisation des deux dimensions qui distinguent les deux structures aboutit à des résultats parfois complètement contraires à ceux préconisés dans d'autres études utilisant une seule des deux dimensions. En effet, on montre que les marchés aux enchères sont moins sensibles aux problèmes d'asymétrie d'information et sont plus efficients. Pour la variance des prix, l'agressivité des stratégies des informés et la profondeur du marché, la comparaison dépend du nombre d'agents dans les marchés.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2003s-67.

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Date of creation: 01 Dec 2003
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Handle: RePEc:cir:cirwor:2003s-67

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Keywords: Auction Markets; dealership markets; market performances; concentration; marchés aux enchères; marchés de contrepartie; performances des marchés; concentration;

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  1. Biais, Bruno, 1993. " Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 157-85, March.
  2. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, Econometric Society, vol. 68(4), pages 799-838, July.
  3. Blume, Marshall E & Goldstein, Michael A, 1997. " Quotes, Order Flow, and Price Discovery," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 221-44, March.
  4. Bernhardt, Dan & Hughson, Eric, 1996. "Discrete Pricing and the Design of Dealership Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 148-182, October.
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