AbstractA standard presumption of market microstructure models is that competition between risk neutral market makers inevitably leads to prices schedules that leave market makers zero expected profits conditional on the order flows. This paper shows that this result does not hold when traders can split orders between market makers. When traders can split orders, market makers set less competitive price schedules that earn them strictly positive profits and hence raise trading costs. Indeed, if noise traders have completely inelastic demands (as in Kyle 1985), market makers want to set arbitrarily uncompetitive price schedules: no equilibrium exists. Our results imply that if feasible, regulation banning order splitting on an exchange is optimal. Analogous results obtain when price schedules are set by any finite number of agents who compete using limit orders. Further, since limit orders, by their very nature, are split against incoming market orders, the analysis suggests that regulated market maker competition will provide better prices.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 888.
Length: 36 pages
Date of creation: Oct 1993
Date of revision:
Other versions of this item:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock).
If references are entirely missing, you can add them using this form.