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

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  • Hans Degryse
  • Mark Van Achter
  • Gunther Wuyts

Abstract

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.

Suggested Citation

  • Hans Degryse & Mark Van Achter & Gunther Wuyts, 2004. "Dynamic order Submission Strategies with Competition between a Dealer Market and a Crossing Network," Working Papers Department of Economics ces0415, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces0415
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    References listed on IDEAS

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    Cited by:

    1. Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2011. "Dark Pool Trading Strategies," Working Papers 421, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Apergis, Nicholas & Voliotis, Dimitrios, 2015. "Spillover effects between lit and dark stock markets: Evidence from a panel of London Stock Exchange transactions," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 101-106.
    3. Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2012. "Internalization, Clearing and Settlement, and Liquidity," CEPR Discussion Papers 8765, C.E.P.R. Discussion Papers.
    4. repec:eee:jfinec:v:124:y:2017:i:2:p:244-265 is not listed on IDEAS
    5. Fany Declerck & Laurence Lescourret, 2015. "Dark pools et trading haute fréquence : une évolution utile ?," Revue d'économie financière, Association d'économie financière, vol. 0(4), pages 113-126.
    6. Linlin Ye, 2016. "Understanding the Impacts of Dark Pools on Price Discovery," Papers 1612.08486, arXiv.org.
    7. Buti, Sabrina & Rindi, Barbara & Wen, Yuanji & Werner, Ingrid M., 2013. "Tick Size Regulation and Sub-Penny Trading," Working Paper Series 2013-14, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    8. Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2014. "Dark Pool Trading Strategies, Market Quality and Welfare," Working Papers 530, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. repec:eee:ecmode:v:65:y:2017:i:c:p:9-17 is not listed on IDEAS
    10. Daniëls, Tijmen R. & Dönges, Jutta & Heinemann, Frank, 2013. "Crossing network versus dealer market: Unique equilibrium in the allocation of order flow," European Economic Review, Elsevier, vol. 62(C), pages 41-57.
    11. Degryse, H.A. & de Jong, F.C.J.M. & van Kervel, V.L., 2011. "The Impact of Dark and Visible Fragmentation on Market Quality (Replaces CentER Discussion Paper 2011-051)," Discussion Paper 2011-069, Tilburg University, Center for Economic Research.
    12. Marios Panayides & Barbara Rindi & Ingrid M. Werner, 2017. "Trading Fees and Intermarket Competition," Working Papers 595, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    13. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2013. "Competition/fragmentation in equities markets: A literature survey," SAFE Working Paper Series 35, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    14. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2016. "Spoilt for choice: Order routing decisions in fragmented equity markets," SAFE Working Paper Series 143, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    15. Hans Degryse & Frank de Jong & Vincent van Kervel, 2015. "The Impact of Dark Trading and Visible Fragmentation on Market Quality," Review of Finance, European Finance Association, vol. 19(4), pages 1587-1622.
    16. Cantillon, Estelle & Yin, Pai-Ling, 2011. "Competition between exchanges: A research agenda," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 329-336, May.
    17. Brugler, James, 2015. "Into the light: dark pool trading and intraday market quality on the primary exchange," Bank of England working papers 545, Bank of England.
    18. Haoxiang Zhu, 2014. "Do Dark Pools Harm Price Discovery?," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 747-789.
    19. M. Alessandra Crisafi & Andrea Macrina, 2014. "Simultaneous Trading in 'Lit' and Dark Pools," Papers 1405.2023, arXiv.org, revised Jan 2016.
    20. van Kervel, V.L., 2013. "Competition between stock exchanges and optimal trading," Other publications TiSEM 5c608a0f-527d-441d-a910-e, Tilburg University, School of Economics and Management.
    21. repec:eee:jfinec:v:124:y:2017:i:3:p:503-534 is not listed on IDEAS

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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