Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets

Bruno Biais

Journal of Finance, 1993, vol. 48, issue 1, 157-85

Abstract: This paper compares centralized.and fragmented markets, such as floor and telephone markets. Risk-averse agents compete for one market order. In centralized markets, these agents a re market makers or limit order traders. They are assumed to observe th e quotes of their competitors. In fragmented markets they are dealers. They can only assess the positions of their competitors. The author analyzes differences in bidding strategies reflecting differences in market structures. The equilibrium number of dealers is shown to be increasing in the frequency of trades and the volatility of the valu e of the asset: The expected spread is shown to be equal in both marke ts, ceteris paribus. But the spread is more volatile in centralized than in fragmented markets. Copyright 1993 by American Finance Association.

Date: 1993
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