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Crossing Network versus Dealer Market: Unique Equilibrium in the Allocation of Order Flow

Author

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  • Jutta Dönges
  • Frank Heinemann
  • Tijmen R. Daniëls

Abstract

The allocation of order flow to alternative trading systems can be understood as a game with strategic substitutes between buyers on the same side of the market, as well as one of positive network externalities. We consider the allocation of order flow between a crossing network and a dealer market and show that small differences in traders' preferences generate a unique switching equilibrium, in which patient traders use the crossing network while impatient traders submit orders directly to the dealer market. Our model explains why assets with large turnovers and low price volatility are likely to be traded on crossing networks, while less liquid assets are traded on dealer markets.

Suggested Citation

  • Jutta Dönges & Frank Heinemann & Tijmen R. Daniëls, 2013. "Crossing Network versus Dealer Market: Unique Equilibrium in the Allocation of Order Flow," SFB 649 Discussion Papers SFB649DP2013-007, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2013-007
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    References listed on IDEAS

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    1. repec:eee:ecmode:v:65:y:2017:i:c:p:9-17 is not listed on IDEAS
    2. 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.
    3. Jana Bielagk & Ulrich Horst & Santiago Moreno--Bromberg, 2016. "A Principal-Agent Model of Trading Under Market Impact -Crossing networks interacting with dealer markets-," Papers 1607.04047, arXiv.org, revised Aug 2016.
    4. M. Alessandra Crisafi & Andrea Macrina, 2014. "Simultaneous Trading in 'Lit' and Dark Pools," Papers 1405.2023, arXiv.org, revised Jan 2016.

    More about this item

    Keywords

    Trading platform; order flow; strategic complements; strategic substitutes; global game;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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