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Dynamic order Submission Strategies with Competition between a Dealer Market and a Crossing Network

Listed author(s):
  • Hans Degryse
  • Mark Van Achter
  • Gunther Wuyts

We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. We consider sequentially arriving agents having different valuations for an asset. Agents maximize their profits by either trading at a DM or by submitting an order for (possibly) uncertain execution at a CN. We develop the analysis for three different informational settings: transparency, “complete” opaqueness of all order flow, and “partial” opaqueness (with observable DM trades). We find that a CN and a DM cater for different types of traders. Investors with a high eagerness to trade are more likely to prefer a DM. The introduction of a CN increases overall order flow by attracting traders who would not otherwise submit orders (“order creation”). It also diverts trades from the DM. The transparency and “partial” opaqueness settings generate systematic patterns in order flow. With transparency, the probability of observing a CN order at the same side of the market is smaller after such an order than if it was not. Buy (sell) orders at a CN are also less likely to attract subsequent sell (buy) orders at the DM.

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File URL: https://lirias.kuleuven.be/bitstream/123456789/121545/1/Dps0415.pdf
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Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces0415.

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Date of creation: Mar 2004
Handle: RePEc:ete:ceswps:ces0415
Contact details of provider: Web page: http://feb.kuleuven.be/Economics/

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