Skip to main content
Article thumbnail
Location of Repository

Dynamic order submission strategies with competition between a dealer market and a crossing network

By Hans Degryse, Mark Van Achter and Gunther Wuyts

Abstract

We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. Sequentially arriving traders with different valuations for an asset maximise their profits either by trading on a DM or by submitting an order for (possibly) uncertain execution via 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 direction if the CN is opaque. Moreover, in all 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 trade from the DM ("trade diversion"). We find that the coexistence of a CN and DM produces more trader welfare than a DM in isolation. Also, more transparent markets lead to greater trader welfare but may reduce overall welfare

Topics: G10, G20, ddc:330, alternative trading systems, crossing network, dealer market, order flow, transparency, welfare, Elektronisches Handelssystem, B\uf6rsenmakler, Transaktionskosten, Theorie
Publisher: Brussels: National Bank of Belgium
Year: 2007
OAI identifier: oai:econstor.eu:10419/144334
Provided by: EconStor

Suggested articles


To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.