The Equivalence of Screen Based Continuous-Auction and Dealer Markets
AbstractThe conventional response given to explain the difference between an auction and dealer markets is that auction markets are order driven and dealer markets are quote driven. However this paper argues that same set of equilibrium prices will obtain in each market. In dealer markets liquidity is supplied by entry of any trader to supply liquidity by permitting the submission of limit orders. In both cases investors face a competitive price schedule, which they can then trade against, and competition between traders in the auction market or between dealers in the dealer market should ensure that liquidity suppliers maker no excess profits.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Special Papers with number sp92.
Date of creation: Nov 1996
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