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Brokered versus dealer markets: Impact of proprietary trading with transaction fees

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  • Nishide, Katsumasa
  • Tian, Yuan

Abstract

In this study, we consider a one-period financial market with a dealer/broker and an infinite number of investors. While the dealer who trades on his own account (with proprietary trading) simultaneously sets both the transaction fee and the asset price, the broker who brings investors' orders to the market (with no proprietary trading) sets only the transaction fee, given that the price is determined according to the market-clearing condition among investors. We analyze the impact of proprietary trading on the asset price, transaction fee, trading volume, and the welfare of investors. We find that the bid and ask prices set by the dealer who can engage in proprietary trading are more favorable to average investors. As a result, both the trading volume and the transaction fee increase, and social welfare improves.

Suggested Citation

  • Nishide, Katsumasa & Tian, Yuan, 2022. "Brokered versus dealer markets: Impact of proprietary trading with transaction fees," International Review of Financial Analysis, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finana:v:81:y:2022:i:c:s1057521918302266
    DOI: 10.1016/j.irfa.2019.101371
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    References listed on IDEAS

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    More about this item

    Keywords

    Proprietary trading; Dealer/brokered market; Transaction fees;
    All these keywords.

    JEL classification:

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

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