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The Equivalence of Screen Based Continuous-Auction and Dealer Markets

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  • Ian Tonks

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Abstract

The conventional response given to explain the difference between an auction and dealer markets is that auction markets are order driven and dealer markets are quote driven. However this paper argues that same set of equilibrium prices will obtain in each market. In dealer markets liquidity is supplied by entry of any trader to supply liquidity by permitting the submission of limit orders. In both cases investors face a competitive price schedule, which they can then trade against, and competition between traders in the auction market or between dealers in the dealer market should ensure that liquidity suppliers maker no excess profits.

Suggested Citation

  • Ian Tonks, 1996. "The Equivalence of Screen Based Continuous-Auction and Dealer Markets," FMG Special Papers sp92, Financial Markets Group.
  • Handle: RePEc:fmg:fmgsps:sp92
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    File URL: http://www.lse.ac.uk/fmg/documents/specialPapers/1990s/sp92.pdf
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    References listed on IDEAS

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    1. Hyun Song Shin, 1996. "Comparing the Robustness of Trading Systems to Higher-Order Uncertainty," Review of Economic Studies, Oxford University Press, vol. 63(1), pages 39-59.
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    12. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-1161, September.
    13. Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    14. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
    15. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, Oxford University Press, vol. 82(1), pages 33-53.
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