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Floors, dealer markets and limit order markets

  • Biais, Bruno
  • Foucault, Thierry
  • Salanie, Francois

In dealer markets, liquidity suppliers have entire flexibility to bargain on the price with their customers. In limit order markets, they are restricted to convex schedules: they cannot sell the first share at a higher price than the second. Floor traders simply respond to the liquidity demand conveyed by brokers by crying out one price. In floor markets risk-sharing is inefficient and spreads are large. In dealer markets, risk-sharing can be efficient, but spreads tend to be large. In limit order markets, the unique equilibrium entails efficient risk-sharing and competitive spreads. Hence there is a non-monotonic relation between the efficiency of the market and the extent to which the offers of the liquidity suppliers are restricted.

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Article provided by Elsevier in its journal Journal of Financial Markets.

Volume (Year): 1 (1998)
Issue (Month): 3-4 (September)
Pages: 253-284

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Handle: RePEc:eee:finmar:v:1:y:1998:i:3-4:p:253-284
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