Dynamic order submission strategies with competition between a dealer market and a crossing network

Hans Degryse, Mark Van Achter and Gunther Wuyts
Additional contact information
Mark Van Achter: University of Bonn
Gunther Wuyts: University of Leuven

No 121, Working Paper Research from National Bank of Belgium

Abstract: We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. Sequentially arriving traders with different valuations for an asset maximise their profits either by trading on a DM or by submitting an order for (possibly) uncertain execution via a CN. We develop the analysis for three different informational settings: transparency, "complete" opaqueness of all order flow, and "partial" opaqueness (with observable DM trades). A key result is that the interaction of trading systems generates systematic patterns in order flow for the transparency and partial opaqueness settings. The precise nature of these patterns depends on the degree of transparency at the CN. While unambiguous with a transparent CN, they may reverse direction if the CN is opaque. Moreover, in all three informational settings, we find that a CN and a DM cater for different types of traders. Investors with a high willingness to trade are more likely to prefer a DM. The introduction of a CN next to a DM also affects welfare as it increases total order flow by attracting traders who would otherwise not submit orders ("order creation"); in addition, it diverts trade from the DM ("trade diversion"). We find that the coexistence of a CN and DM produces more trader welfare than a DM in isolation. Also, more transparent markets lead to greater trader welfare but may reduce overall welfare.

Keywords: alternative trading systems; crossing network; dealer market; order flow; transparency; welfare (search for similar items in EconPapers)
JEL-codes: G10 G20 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2007-12
New Economics Papers: this item is included in nep-cse, nep-mst and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.nbb.be/doc/ts/publications/wp/wp121en.pdf (application/pdf)

Related works:
Journal Article: Dynamic order submission strategies with competition between a dealer market and a crossing network (2009)
Working Paper: Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network (2007)
Working Paper: Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network (2007)
Working Paper: Dynamic order Submission Strategies with Competition between a Dealer Market and a Crossing Network (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:200712-15

Access Statistics for this paper

More papers in Working Paper Research from National Bank of Belgium Contact information at EDIRC.
Bibliographic data for series maintained by (documentation@nbb.be).