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Competition among Trading Venues: Information and Trading on Electronic Communications Networks

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  • Michael J. Barclay
  • Terrence Hendershott
  • D. Timothy McCormick

Abstract

This paper explores the competition between two trading venues, Electronic Communication Networks (ECNs) and Nasdaq market makers. ECNs offer the advantages of anonymity and speed of execution, which attract informed traders. Thus, trades are more likely to occur on ECNs when information asymmetry is greater and when trading volume and stock‐return volatility are high. ECN trades have greater permanent price impacts and more private information is revealed through ECN trades than though market‐maker trades. However, ECN trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and offer them better executions.

Suggested Citation

  • Michael J. Barclay & Terrence Hendershott & D. Timothy McCormick, 2003. "Competition among Trading Venues: Information and Trading on Electronic Communications Networks," Journal of Finance, American Finance Association, vol. 58(6), pages 2637-2665, December.
    • Handle: RePEc:bla:jfinan:v:58:y:2003:i:6:p:2637-2665
    DOI: 10.1046/j.1540-6261.2003.00618.x
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    References listed on IDEAS

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