Advanced Search
MyIDEAS: Login

Equilibrium Fee Schedules in a Monopolist Call Market

Contents:

Author Info

  • Nicholas Economides
  • Jeff Heisler

Abstract

Liquidity plays a crucial role in financial exchange markets. Markets typically create liquidity through spatial consolidation with specialist/market makers matching orders arriving at different times. However, continuous trading systems have an inherent weakness in the potential for insufficient liquidity. This risk was highlighted during the 1987 market crash. Subsequent proposals suggested time consolidation in the form of call markets integrated into the continuous trading environment. This paper explores the optimal fee schedule for a monopolist call market auctioneer competing with a continuous auction market. Liquidity is an externality in that traders are not fully compensated for the liquidity they bring to the market. Thus, in the absence of differential transaction costs, traders have an incentive to delay order entry resulting in significant uncertainty in the number of traders participating at the call. A well-designed call market mechanism has to mitigate this uncertainty. The trading mechanism examined utilizes two elements: commitments to trade and discounts in fees for early commitment; thus, optimal transaction fees are time-dependent. Traders who commit early are rewarded for the enhanced liquidity that their commitment provides to the market. As participants commit earlier they pay strictly lower fees and are strictly better off by participating in the call market rather than in the continuous market. A comparison to the social welfare maximizing fee schedule shows that the monopolist does not internalize the externality completely, with the social welfare maximizing schedule offering lower fees to all traders.

Download Info

If 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.
File URL: http://raven.stern.nyu.edu/networks/94-15.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Viveca Licata)
Download Restriction: no

Bibliographic Info

Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 94-15.

as in new window
Length:
Date of creation: Jul 1994
Date of revision:
Handle: RePEc:ste:nystbu:94-15

Contact details of provider:
Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/
More information through EDIRC

Related research

Keywords:

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Nicholas Economides & Robert Schwartz,, . "Electronic Call Market Trading," Financial Networks _001, Economics of Networks.
  2. Nicholas Economides & Robert A. Schwartz, . "Making the Trade: Equity Trading Practices and Market Structure - 1994," Financial Networks _003, Economics of Networks.
  3. Nicholas Economides, 1994. "How to Enhance Market Liquidity," Working Papers 94-03, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  5. Economides, Nicholas & Siow, Aloysius, 1988. "The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)," American Economic Review, American Economic Association, vol. 78(1), pages 108-21, March.
  6. Garbade, Kenneth D & Silber, William L, 1976. "Price Dispersion in the Government Securities Market," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 721-40, August.
  7. Garbade, Kenneth D & Silber, William L, 1979. "Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk," Journal of Finance, American Finance Association, vol. 34(3), pages 577-93, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Hasan, Iftekhar & Schmiedel , Heiko, 2003. "Do networks in the stock exchange industry pay off? European evidence," Research Discussion Papers 2/2003, Bank of Finland.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ste:nystbu:94-15. See general 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: (Viveca Licata).

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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