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Transparency matters: Price formation in the presence of order preferencing

Author

Listed:
  • Laurence Lescourret
  • Christian Y. Robert

    (LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

Abstract

Using a market-making inventory model, we analyze the impact of order preferencing on dealers' quoting behavior by changing the degree of quote disclosure. We find that preferenced orders raise the inventory-holding costs of preferenced dealers, making them less able to post attractive quotes. In turn, competitors choose less aggressive prices, but still attract more likely public orders. Price competition is smoothed and expected market spreads widen. Promoting competition might be, however, enforced by (i) fine tuning through the degree of market transparency, (ii) favoring the entry of unpreferenced dealers, or (iii) requiring preferenced market-makers to have more funding capital.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Laurence Lescourret & Christian Y. Robert, 2011. "Transparency matters: Price formation in the presence of order preferencing," Post-Print hal-04854777, HAL.
    • Handle: RePEc:hal:journl:hal-04854777
    DOI: 10.1016/j.finmar.2010.09.002
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    1. is not listed on IDEAS
    2. Moinas, Sophie & Valente, Giorgio & Nguyen, Minh Hai, 2017. "Funding Constraints and Market Illiquidity in the European Treasury Bond Market," TSE Working Papers 17-814, Toulouse School of Economics (TSE).
    3. Laurence Lescourret, 2017. "Cold Case File? Inventory Risk and Information Sharing during the pre†1997 NASDAQ," European Financial Management, European Financial Management Association, vol. 23(4), pages 761-806, September.
    4. Wang, Ming-Chang & Cheng, Lee-Young & Ko, Chien-Chuan & Chou, Pang-Ying, 2018. "Does public latency influence market quality? An analysis of pre-trade transparency at the Taiwan futures exchange," The Quarterly Review of Economics and Finance, Elsevier, vol. 70(C), pages 227-240.
    5. Laurence Lescourret, 2012. "Non-fundamental Information and Market-makers' Behavior during the NASDAQ Preopening Session," Working Papers hal-00772798, HAL.
    6. Louisa Chen & Liya Shen & Zhiping Zhou, 2023. "Understand funding liquidity and market liquidity in a regime‐switching model," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 589-605, January.
    7. Wang, Ming-Chang & Ding, Yu-Jia & Chiang, Hsin-Chieh, 2018. "Do enterprise–bank relationships improve market quality? Evidence from Taiwan," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 79-91.
    8. repec:hal:journl:hal-00772798 is not listed on IDEAS

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