IDEAS home Printed from https://ideas.repec.org/p/kyo/wpaper/922.html
   My bibliography  Save this paper

Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees

Author

Listed:
  • Katsumasa Nishide

    (Department of Economics, Yokohama National University)

  • Yuan Tian

    (Faculty of Economics, Ryukoku University)

Abstract

In this study, we consider a one-period financial market with a monopolistic dealer/broker and an infinite number of investors. While the dealer who trades on his own account (with proprietary trading) simultaneously sets both the transaction fee and the asset price, the broker who brings investors’ orders to the market (with no proprietary trading) sets only the transaction fee, given that the price is determined according to the marketclearing condition among investors. We analyze the impact of proprietary trading on the asset price, transaction fee, trading volume, and the welfare of investors. Results show that proprietary trading increases both the trading volume and the transaction fee, and improves social welfare. Our study effectively demonstrates how proprietary trading affects market equilibrium and welfare of investors.

Suggested Citation

  • Katsumasa Nishide & Yuan Tian, 2015. "Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees," KIER Working Papers 922, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:922
    as

    Download full text from publisher

    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP922.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Leonardo Gambacorta & Adrian van Rixtel, 2013. "Structural bank regulation initiatives: approaches and implications," BANCARIA, Bancaria Editrice, vol. 6, pages 14-27, June.
    2. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    3. Bernhardt, Dan & Taub, Bart, 2010. "How and when is dual trading irrelevant?," Journal of Financial Markets, Elsevier, vol. 13(2), pages 295-320, May.
    4. Sarkar Asani, 1995. "Dual Trading: Winners, Losers, and Market Impact," Journal of Financial Intermediation, Elsevier, vol. 4(1), pages 77-93, January.
    5. Kim, O & Verrecchia, Re, 1991. "Trading Volume And Price Reactions To Public Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 302-321.
    6. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-657, May.
    7. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nishide, Katsumasa & Tian, Yuan, 2022. "Brokered versus dealer markets: Impact of proprietary trading with transaction fees," International Review of Financial Analysis, Elsevier, vol. 81(C).
    2. He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," The Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 919-972.
    3. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity -- Theory and Empirical Evidence," NBER Working Papers 18251, National Bureau of Economic Research, Inc.
    4. Danilova, Albina & Julliard, Christian, 2014. "Information asymmetries, volatility, liquidity, and the Tobin Tax," LSE Research Online Documents on Economics 60957, London School of Economics and Political Science, LSE Library.
    5. Masahiro Watanabe, 2002. "Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry," Yale School of Management Working Papers amz2636, Yale School of Management, revised 01 Jul 2002.
    6. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    7. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    8. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    9. Jean†Franã‡Ois L'Her & Jean†Marc Suret, 1996. "Consensus, dispersion et prix des titres," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 229-249, March.
    10. Yi-Mien Lin & Taychang Wang, 2001. "The effect of sequential information releases on trading volume and price behaviour," Accounting and Business Research, Taylor & Francis Journals, vol. 31(2), pages 119-132.
    11. Masahiro Watanabe, 2002. "Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry," Yale School of Management Working Papers amz2636, Yale School of Management, revised 01 Jul 2002.
    12. Jean†Franã‡Ois L'Her & Jean†Marc Suret, 1996. "Consensus, Dispersion and Security prices," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 209-228, March.
    13. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
    14. Emiliano Pagnotta, 2016. "Chasing Private Information," 2016 Meeting Papers 1673, Society for Economic Dynamics.
    15. Marcello Miccoli, 2012. "Optimal dynamic public communication," Temi di discussione (Economic working papers) 856, Bank of Italy, Economic Research and International Relations Area.
    16. Philippe Bacchetta & Eric Van Wincoop, 2008. "Higher Order Expectations in Asset Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 837-866, August.
    17. Li, Frank Weikai & Sun, Chengzhu, 2022. "Information acquisition and expected returns: Evidence from EDGAR search traffic," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    18. Georgy Chabakauri & Kathy Yuan & Konstantinos E Zachariadis, 2022. "Multi-asset Noisy Rational Expectations Equilibrium with Contingent Claims [A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2445-2490.
    19. Nicolas S. Lambert & Michael Ostrovsky & Mikhail Panov, 2018. "Strategic Trading in Informationally Complex Environments," Econometrica, Econometric Society, vol. 86(4), pages 1119-1157, July.
    20. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.

    More about this item

    Keywords

    Proprietary trading; dealer market; brokered market; transaction fees;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kyo:wpaper:922. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Makoto Watanabe (email available below). General contact details of provider: https://edirc.repec.org/data/iekyojp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.