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Trading under market impact: Crossing networks interacting with dealer markets

Author

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  • Bielagk, Jana
  • Horst, Ulrich
  • Moreno-Bromberg, Santiago

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. The dealer must take into consideration that traders have this alternative when choosing a pricing schedule. We show that the presence of a crossing network may benefit traders even if they do not trade in it. Furthermore, it results in more traders being serviced by the dealer and the book’s spread shrinking (under certain conditions). We allow for the pricing on the dealer market to determine the structure of the crossing network, which itself influences the structure of the dealer market. This results in a feedback look that, under the same conditions that lead to a reduction of the spread, yields an equilibrium book/crossing network pair.

Suggested Citation

  • Bielagk, Jana & Horst, Ulrich & Moreno-Bromberg, Santiago, 2019. "Trading under market impact: Crossing networks interacting with dealer markets," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 131-151.
    • Handle: RePEc:eee:dyncon:v:100:y:2019:i:c:p:131-151
    DOI: 10.1016/j.jedc.2018.09.009
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Martin Herdegen & Johannes Muhle-Karbe & Florian Stebegg, 2021. "Liquidity Provision with Adverse Selection and Inventory Costs," Papers 2107.12094, arXiv.org.
    2. Duong, Huu Nhan & Kalev, Petko S. & Tian, Xiao Jason, 2022. "Does the bid–ask spread affect trading in exchange operated dark pools? Evidence from a natural experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).

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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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