Trading under Market Impact

Jana Bielagk, Ulrich Horst and Santiago Moreno-Bromberg
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Jana Bielagk: Humboldt University Berlin
Santiago Moreno-Bromberg: University of Zurich

No 39, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

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. We show that the presence of such a network results in more trader types being serviced by the dealer and that, under certain conditions, the book\'s spread shrinks. We allow for the pricing on the dealer market to determine the structure of the crossing network and show that the same conditions that lead to a reduction of the spread imply the existence of an equilibrium book or 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: 2017-07-01
New Economics Papers: this item is included in nep-mic and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:39

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