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Implicit Collusion in Dealer Markets with Different Costs of Market Making

Author

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  • Andreas Krause

    (University of Fribourg, Switzerland)

Abstract

This paper introduces different costs into the Dutta-Madhavan model of implicit collusion between market makers. It will be shown how different costs of market making influence the possibility of implicit collusion and the price setting. The derived model will then be applied to the case of discrete prices. We will see how the tick size and the location of the reservation prices relative to the price grid affect the price setting. It will be shown which problems arise when examining the developed model in an empirical investigation. It is shown that the empirical evidence may only be very poor, even under ideal circumstances. Finally policy implications are considered.

Suggested Citation

  • Andreas Krause, 1999. "Implicit Collusion in Dealer Markets with Different Costs of Market Making," Finance 9903002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9903002
    Note: Type of Document - PostScript; prepared on IBM PC ; to print on PostScript; pages: 24 ; figures: included
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    References listed on IDEAS

    as
    1. Christie, William G & Schultz, Paul H, 1994. "Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1813-1840, December.
    2. Dutta, Prajit K & Madhavan, Ananth, 1997. "Competition and Collusion in Dealer Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 245-276, March.
    3. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-396, March.
    4. Stoll, Hans R, 1978. "The Supply of Dealer Services in Securities Markets," Journal of Finance, American Finance Association, vol. 33(4), pages 1133-1151, September.
    5. Ho, Thomas & Stoll, Hans R, 1980. "On Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 35(2), pages 259-267, May.
    6. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    7. Christie, William G & Harris, Jeffrey H & Schultz, Paul H, 1994. "Why Did NASDAQ Market Makers Stop Avoiding Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1841-1860, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bid-Ask Prices; Market Maker; Implicit Collusion;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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