Optimal Market Size
This paper studies endogenous market formation in a ?nancial trading model where strategic traders face information asymmetries and aggregate shocks. First, we show that negative participation externalities can arise for a large class of assets. In a decentralized process of market formation, the negative externalities limit competition between intermediaries. The model predicts that free entry into intermediation causes market fragmentation, but it is Pareto-superior to a single market. The model also predicts that the more intense the information asymmetry, the more a security tends to trade in fragmented markets.
|Date of creation:||2013|
|Contact details of provider:|| Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia|
Phone: +61 3 8344 8560
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Web page: http://fbe.unimelb.edu.au/economics
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References listed on IDEAS
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- José M. Marín & Rohit Rahi, 2000. "Information Revelation and Market Incompleteness," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 563-579.
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- Thierry Foucault, 2010. "Competition for Order Flow and Smart Order Routing Systems," Post-Print hal-00554030, HAL.
- Thierry Foucault & Albert J. Menkveld, 2008. "Competition for Order Flow and Smart Order Routing Systems," Post-Print hal-00459801, HAL.
- Foucault, Thierry & Menkveld, Albert, 2006. "Competition for order flow and smart order routing systems," Les Cahiers de Recherche 831, HEC Paris.
- William O. Brown & J. Harold Mulherin & Marc D. Weidenmier, 2008. "Competing with the New York Stock Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1679-1719.
- Spiegel, Matthew & Subrahmanyam, Avanidhar, 1992. "Informed Speculation and Hedging in a Noncompetitive Securities Market," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 307-329.
- Cantillon, Estelle & Yin, Pai-Ling, 2008. "Competition between Exchanges: Lessons from the Battle of the Bund," CEPR Discussion Papers 6923, C.E.P.R. Discussion Papers.
- Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
- Ananth N. Madhavan, "undated". "Trading Mechanisms in Securities Markets," Rodney L. White Center for Financial Research Working Papers 16-90, Wharton School Rodney L. White Center for Financial Research.
- Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
- O'Hara, Maureen & Ye, Mao, 2011. "Is market fragmentation harming market quality?," Journal of Financial Economics, Elsevier, vol. 100(3), pages 459-474, June.
- Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
- Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June. Full references (including those not matched with items on IDEAS)
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