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Trading under Market Impact

Author

Listed:
  • Bielagk, Jana

    (Humboldt University Berlin)

  • Horst, Ulrich

    (Humboldt University Berlin)

  • Moreno-Bromberg, Santiago

    (University of Zurich)

Abstract

We use a model with agency frictions to analyze the structure of a dealer market that faces competition from a crossing network. Traders are privately informed about their types (e.g. their portfolios), which is something the dealer must take into account when engaging his counterparties. Instead of participating in the dealer market, the traders may take their business to a crossing network. We show that the presence of such a network results in more trader types being serviced by the dealer and that, under certain conditions, the book\'s spread shrinks. We allow for the pricing on the dealer market to determine the structure of the crossing network and show that the same conditions that lead to a reduction of the spread imply the existence of an equilibrium book or crossing network pair.

Suggested Citation

  • Bielagk, Jana & Horst, Ulrich & Moreno-Bromberg, Santiago, 2017. "Trading under Market Impact," Rationality and Competition Discussion Paper Series 39, CRC TRR 190 Rationality and Competition.
  • Handle: RePEc:rco:dpaper:39
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    More about this item

    Keywords

    asymmetric information; crossing networks; dealer markets; non-linear pricing; principal-agent games;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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