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Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network

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  • Degryse, H.A.

    (Tilburg University, TILEC)

  • van Achter, M.
  • Wuyts, G.

Abstract

We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. Sequentially arriving agents with different valuations for an asset maximize their profits either by trading at a DM or by submitting an order for (possibly) uncertain execution at a CN. We develop the analysis for three different informational settings: transparency, “complete” opaqueness of all order flow, and “partial” opaqueness (with observable DM trades). A key result is that the interaction of trading systems generates systematic patterns in order flow for the transparency and partial opaqueness settings. The precise nature of these patterns depends on the degree of transparency at the CN. While unambiguous with a transparent CN, they may reverse in direction if the CN is opaque. Moreover, common to the three informational settings, we find that a CN and a DM cater for different types of traders. Investors with a high willingness to trade are more likely to prefer a DM. The introduction of a CN next to a DM also affects welfare as it increases total order flow by attracting traders who would otherwise not submit orders (“order creation”); in addition, it diverts trades from the DM (“trade diversion”). We find that the coexistence of a CN and DM produces greater trader welfare than a DM in isolation. Also, more transparent markets lead to greater trader welfare but may reduce overall welfare.

Suggested Citation

  • Degryse, H.A. & van Achter, M. & Wuyts, G., 2007. "Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network," Discussion Paper 2007-017, Tilburg University, Tilburg Law and Economic Center.
  • Handle: RePEc:tiu:tiutil:a63f4ee1-35ab-4fe3-a4ba-22949e7e29d2
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Brugler, James, 2015. "Into the light: dark pool trading and intraday market quality on the primary exchange," Bank of England working papers 545, Bank of England.
    2. Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2011. "Dark Pool Trading Strategies," Working Papers 421, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Apergis, Nicholas & Voliotis, Dimitrios, 2015. "Spillover effects between lit and dark stock markets: Evidence from a panel of London Stock Exchange transactions," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 101-106.
    4. Degryse, H.A. & van Achter, M. & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Discussion Paper 2012-001, Tilburg University, Tilburg Law and Economic Center.
    5. Sabrina Buti & Barbara Rindi & Yuanji Wen & Ingrid M. Werner, 2013. "Tick Size Regulation and Sub-Penny Trading," Working Papers 492, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    6. repec:kap:decono:v:166:y:2018:i:2:d:10.1007_s10645-018-9316-0 is not listed on IDEAS
    7. repec:eee:jfinec:v:124:y:2017:i:2:p:244-265 is not listed on IDEAS
    8. Daniëls, Tijmen R. & Dönges, Jutta & Heinemann, Frank, 2013. "Crossing network versus dealer market: Unique equilibrium in the allocation of order flow," European Economic Review, Elsevier, vol. 62(C), pages 41-57.
    9. Haoxiang Zhu, 2014. "Do Dark Pools Harm Price Discovery?," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 747-789.
    10. Degryse, H.A. & de Jong, F.C.J.M. & van Kervel, V.L., 2011. "The Impact of Dark and Visible Fragmentation on Market Quality (Replaces CentER Discussion Paper 2011-051)," Discussion Paper 2011-069, Tilburg University, Center for Economic Research.
    11. Fany Declerck & Laurence Lescourret, 2015. "Dark pools et trading haute fréquence : une évolution utile ?," Revue d'économie financière, Association d'économie financière, vol. 0(4), pages 113-126.
    12. M. Alessandra Crisafi & Andrea Macrina, 2014. "Simultaneous Trading in 'Lit' and Dark Pools," Papers 1405.2023, arXiv.org, revised Jan 2016.
    13. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2016. "Spoilt for choice: Order routing decisions in fragmented equity markets," CFR Working Papers 16-04, University of Cologne, Centre for Financial Research (CFR).
    14. Marios Panayides & Barbara Rindi & Ingrid M. Werner, 2017. "Trading Fees and Intermarket Competition," Working Papers 595, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    15. Hans Degryse & Frank de Jong & Vincent van Kervel, 2015. "The Impact of Dark Trading and Visible Fragmentation on Market Quality," Review of Finance, European Finance Association, vol. 19(4), pages 1587-1622.
    16. Cantillon, Estelle & Yin, Pai-Ling, 2011. "Competition between exchanges: A research agenda," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 329-336, May.
    17. Marios Panayides & Barbara Rindi & Ingrid M.Werner, 2017. "Trading Fees and Intermarket Competition," BAFFI CAREFIN Working Papers 1751, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    18. Gomber, Peter & Sagade, Satchit & Theissen, Erik & Weber, Moritz Christian & Westheide, Christian, 2013. "Competition/fragmentation in equities markets: A literature survey," SAFE Working Paper Series 35, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    19. Linlin Ye, 2016. "Understanding the Impacts of Dark Pools on Price Discovery," Papers 1612.08486, arXiv.org.
    20. van Kervel, V.L., 2013. "Competition between stock exchanges and optimal trading," Other publications TiSEM 5c608a0f-527d-441d-a910-e, Tilburg University, School of Economics and Management.
    21. Menkveld, Albert J. & Yueshen, Bart Zhou & Zhu, Haoxiang, 2017. "Shades of darkness: A pecking order of trading venues," Journal of Financial Economics, Elsevier, vol. 124(3), pages 503-534.
    22. Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2014. "Dark Pool Trading Strategies, Market Quality and Welfare," Working Papers 530, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    23. repec:eee:ecmode:v:65:y:2017:i:c:p:9-17 is not listed on IDEAS
    24. Peter Kratz & Torsten Schöneborn, 2014. "Optimal liquidation in dark pools," Quantitative Finance, Taylor & Francis Journals, vol. 14(9), pages 1519-1539, September.
    25. repec:bla:jecsur:v:31:y:2017:i:3:p:792-814 is not listed on IDEAS

    More about this item

    Keywords

    Alternative Trading Systems; Crossing Network; Dealer Market; Order Flow; Transparency; Welfare;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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