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Floors, dealer markets and limit order markets

Author

Listed:
  • Thierry Foucault

    () (GSIA, Carnegie Mellon University - Carnegie Mellon University)

  • Bruno Biais
  • Francois Salanie

    ()

Abstract

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.

Suggested Citation

  • Thierry Foucault & Bruno Biais & Francois Salanie, 1998. "Floors, dealer markets and limit order markets," Post-Print hal-00481194, HAL.
  • Handle: RePEc:hal:journl:hal-00481194
    DOI: 10.1016/S1386-4181(98)00003-2
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00481194
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    References listed on IDEAS

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    Cited by:

    1. Andrea Attar & Thomas Mariotti & François Salanié, 2014. "On Competitive Nonlinear Pricing," CEIS Research Paper 314, Tor Vergata University, CEIS, revised 18 Apr 2014.
    2. repec:dau:papers:123456789/3017 is not listed on IDEAS
    3. Ghadhab, Imen & Hellara, Slaheddine, 2016. "Price discovery of cross-listed firms," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 177-188.
    4. Hélena Beltran-Lopez & Joachim Grammig & Albert J. Menkveld, 2012. "Limit order books and trade informativeness," The European Journal of Finance, Taylor & Francis Journals, vol. 18(9), pages 737-759, October.
    5. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    6. repec:dau:papers:123456789/295 is not listed on IDEAS
    7. Viswanathan, S. & Wang, James J. D., 2002. "Market architecture: limit-order books versus dealership markets," Journal of Financial Markets, Elsevier, vol. 5(2), pages 127-167, April.
    8. Xing, Xiaochuan & Xue, Yi, 2017. "Trading mechanisms and market quality: Limit-order books versus dealership markets," Economics Letters, Elsevier, vol. 154(C), pages 35-44.
    9. Laurence Daures Lescourret & Sophie Moinas, 2018. "Fragmentation and Strategic Market-Making," EconPol Working Paper 15, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    10. repec:pal:assmgt:v:19:y:2018:i:3:d:10.1057_s41260-018-0075-x is not listed on IDEAS
    11. Matthew Spiegel & Harry Mamaysky, 2001. "A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization," Yale School of Management Working Papers amz2507, Yale School of Management.
    12. Minarelli, Francesca & Galioto, Francesco & Raggi, Meri & Viaggi, Davide, 2016. "Modelling asymmetric information in a food supply chain within Emilia Romagna Region," 149th Seminar, October 27-28, 2016, Rennes, France 245071, European Association of Agricultural Economists.
    13. Scott Brown & Timothy Koch & Eric Powers, 2009. "Slippage And The Choice Of Market Or Limit Orders In Futures Trading," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(3), pages 309-335.

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