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Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees

Author

Listed:
  • Katsumasa Nishide

    (Department of Economics, Yokohama National University)

  • Yuan Tian

    (Faculty of Economics, Ryukoku University)

Abstract

In this study, we consider a one-period financial market with a monopolistic 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 marketclearing condition among investors. We analyze the impact of proprietary trading on the asset price, transaction fee, trading volume, and the welfare of investors. Results show that proprietary trading increases both the trading volume and the transaction fee, and improves social welfare. Our study effectively demonstrates how proprietary trading affects market equilibrium and welfare of investors.

Suggested Citation

  • Katsumasa Nishide & Yuan Tian, 2015. "Auction versus Dealership Markets: Impact of Proprietary Trading with Transaction Fees," KIER Working Papers 922, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:922
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP922.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Proprietary trading; dealer market; 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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