Trading under market impact: Crossing networks interacting with dealer markets

Jana Bielagk, Ulrich Horst and Santiago Moreno-Bromberg

Journal of Economic Dynamics and Control, 2019, vol. 100, issue C, 131-151

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.

Keywords: Asymmetric information; Crossing networks; Dealer markets; Non-linear pricing; Principal–agent games (search for similar items in EconPapers)
JEL-codes: D42 D53 G12 G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:100:y:2019:i:c:p:131-151

DOI: 10.1016/j.jedc.2018.09.009

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